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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
 ¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to              .
Commission File Number 001-34571
 
 
 
 
 
 
PEBBLEBROOK HOTEL TRUST
 
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
 
Maryland
 
27-1055421
(State of Incorporation
or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
7315 Wisconsin Avenue, 1100 West
Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
(240) 507-1300
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☑  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☑  Yes   ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 ☐ (do not check if a smaller reporting company)
 
Smaller reporting company
 
 
 
Emerging growth company
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ☑  No



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 19, 2019
Common shares of beneficial interest ($0.01 par value per share)
 
130,631,217



Pebblebrook Hotel Trust
TABLE OF CONTENTS
 
 
 
 
Page
PART I. FINANCIAL INFORMATION
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.


Pebblebrook Hotel Trust
Consolidated Balance Sheets
(In thousands, except share data)
 
March 31,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Investment in hotel properties, net
$
6,615,258

 
$
6,534,193

Ground lease asset, net

 
199,745

Cash and cash equivalents
51,417

 
83,366

Restricted cash
25,654

 
24,445

Hotel receivables (net of allowance for doubtful accounts of $374 and $526, respectively)
71,971

 
59,897

Prepaid expenses and other assets
68,897

 
76,702

Total assets
$
6,833,197

 
$
6,978,348

LIABILITIES AND EQUITY
 
 
 
Debt
$
2,507,358

 
$
2,746,898

Accounts payable and accrued expenses
503,826

 
360,279

Deferred revenues
51,235

 
54,741

Accrued interest
5,800

 
2,741

Distribution payable
58,179

 
43,759

Total liabilities
3,126,398

 
3,208,418

Commitments and contingencies (Note 11)

 

Shareholders’ equity:
 
 
 
Preferred shares of beneficial interest, $.01 par value (liquidation preference $510,000 at March 31, 2019 and at December 31, 2018), 100,000,000 shares authorized; 20,400,000 shares issued and outstanding at March 31, 2019 and December 31, 2018
204

 
204

Common shares of beneficial interest, $.01 par value, 500,000,000 shares authorized; 130,484,956 issued and outstanding at March 31, 2019 and 130,311,289 issued and outstanding at December 31, 2018
1,305

 
1,303

Additional paid-in capital
4,063,830

 
4,065,804

Accumulated other comprehensive income (loss)
(7,709
)
 
1,330

Distributions in excess of retained earnings
(361,081
)
 
(308,806
)
Total shareholders’ equity
3,696,549

 
3,759,835

Non-controlling interests
10,250

 
10,095

Total equity
3,706,799

 
3,769,930

Total liabilities and equity
$
6,833,197

 
$
6,978,348

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


3

Table of Contents

Pebblebrook Hotel Trust
Consolidated Statements of Operations and Comprehensive Income
(In thousands, except share and per-share data)
(Unaudited)

 
For the three months ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Room
$
248,986

 
$
122,471

Food and beverage
86,750

 
44,568

Other operating
31,433

 
14,016

Total revenues
367,169

 
181,055

Expenses:
 
 
 
Hotel operating expenses:
 
 
 
Room
67,375

 
31,708

Food and beverage
63,357

 
30,596

Other direct and indirect
106,075

 
51,839

Total hotel operating expenses
236,807

 
114,143

Depreciation and amortization
54,302

 
24,902

Real estate taxes, personal property taxes, property insurance, and ground rent
31,437

 
12,115

General and administrative
8,629

 
2,337

Transaction costs
2,497

 
378

(Gain) loss and other operating expenses
3,560

 
(4,208
)
Total operating expenses
337,232

 
149,667

Operating income (loss)
29,937

 
31,388

Interest expense
(29,328
)
 
(9,811
)
Other
9

 
2,510

Income (loss) before income taxes
618

 
24,087

Income tax (expense) benefit
5,037

 
429

Net income (loss)
5,655

 
24,516

Net income (loss) attributable to non-controlling interests
20

 
107

Net income (loss) attributable to the Company
5,635

 
24,409

Distributions to preferred shareholders
(8,139
)
 
(4,023
)
Net income (loss) attributable to common shareholders
$
(2,504
)
 
$
20,386

Net income (loss) per share available to common shareholders, basic
$
(0.02
)
 
$
0.29

Net income (loss) per share available to common shareholders, diluted
$
(0.02
)
 
$
0.29

Weighted-average number of common shares, basic
130,431,074

 
68,876,444

Weighted-average number of common shares, diluted
130,431,074

 
69,208,048


4

Table of Contents

Pebblebrook Hotel Trust
Consolidated Statements of Operations and Comprehensive Income - Continued
(In thousands, except share and per-share data)
(Unaudited)

 
For the three months ended March 31,
 
2019
 
2018
 
 
 
 
Comprehensive Income:
 
 
 
Net income (loss)
$
5,655

 
$
24,516

Other comprehensive income (loss):
 
 
 
Unrealized gain (loss) on derivative instruments
(9,039
)
 
5,278

Other

 
(579
)
Comprehensive income (loss)
(3,384
)
 
29,215

Comprehensive income (loss) attributable to non-controlling interests
(6
)
 
123

Comprehensive income (loss) attributable to the Company
$
(3,378
)
 
$
29,092

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


5

Table of Contents


Pebblebrook Hotel Trust
Consolidated Statements of Equity
(In thousands, except share data)
(Unaudited)
 
 
Preferred Shares
 
Common Shares
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
 Distributions in Excess of Retained Earnings
 
Total Shareholders' Equity
 
Non-Controlling Interests
 
Total Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
10,000,000

 
$
100

 
68,812,575

 
$
688

 
$
1,685,437

 
$
3,689

 
$
(191,013
)
 
$
1,498,901

 
$
4,625

 
$
1,503,526

Issuance of common shares for Board of Trustees compensation
 

 

 
17,410

 
1

 
661

 

 

 
662

 

 
662

Repurchase of common shares
 

 

 
(69,687
)
 
(1
)
 
(2,506
)
 

 

 
(2,507
)
 

 
(2,507
)
Share-based compensation
 

 

 
151,887

 
1

 
(546
)
 

 

 
(545
)
 
276

 
(269
)
Distributions on common shares/units
 

 

 

 

 

 

 
(26,184
)
 
(26,184
)
 
(90
)
 
(26,274
)
Distributions on preferred shares
 

 

 

 

 

 

 
(4,023
)
 
(4,023
)
 

 
(4,023
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
 

 

 

 

 

 
5,278

 

 
5,278

 

 
5,278

Unrealized gain (loss) on marketable securities
 

 

 

 

 

 
(579
)
 

 
(579
)
 

 
(579
)
Cumulative effect adjustment from adoption of new accounting standard
 

 

 

 

 

 
548

 
(548
)
 

 

 

Net income (loss)
 

 

 

 

 

 

 
24,409

 
24,409

 
107

 
24,516

Balance at March 31, 2018
 
10,000,000

 
$
100

 
68,912,185

 
$
689

 
$
1,683,046

 
$
8,936

 
$
(197,359
)
 
$
1,495,412

 
$
4,918

 
$
1,500,330

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
20,400,000

 
$
204

 
130,311,289

 
$
1,303

 
$
4,065,804

 
$
1,330

 
$
(308,806
)
 
$
3,759,835

 
$
10,095

 
$
3,769,930

Issuance of shares, net of offering costs
 

 

 

 

 
(275
)
 

 

 
(275
)
 

 
(275
)
Issuance of common shares for Board of Trustees compensation
 

 

 
25,282

 
1

 
739

 

 

 
740

 

 
740

Repurchase of common shares
 

 

 
(126,681
)
 
(1
)
 
(4,008
)
 

 

 
(4,009
)
 

 
(4,009
)
Share-based compensation
 

 

 
275,066

 
2

 
1,570

 

 

 
1,572

 
276

 
1,848

Distributions on common shares/units
 

 

 

 

 

 

 
(49,771
)
 
(49,771
)
 
(141
)
 
(49,912
)
Distributions on preferred shares
 

 

 

 

 

 

 
(8,139
)
 
(8,139
)
 

 
(8,139
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
 

 

 

 

 

 
(9,039
)
 

 
(9,039
)
 

 
(9,039
)
Net income (loss)
 

 

 

 

 

 

 
5,635

 
5,635

 
20

 
5,655

Balance at March 31, 2019
 
20,400,000

 
$
204

 
130,484,956

 
$
1,305

 
$
4,063,830

 
$
(7,709
)
 
$
(361,081
)
 
$
3,696,549

 
$
10,250

 
$
3,706,799



6

Table of Contents

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

7

Table of Contents


Pebblebrook Hotel Trust
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
For the three months ended March 31,
 
2019
 
2018
Operating activities:
 
 
 
Net income (loss)
$
5,655

 
$
24,516

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
54,302

 
24,902

Share-based compensation
1,848

 
(269
)
Amortization of deferred financing costs and mortgage loan premiums
1,488

 
518

Non-cash ground rent
1,520

 
676

Other
2,222

 
502

Changes in assets and liabilities:
 
 
 
Hotel receivables
(12,793
)
 
(4,452
)
Prepaid expenses and other assets
54

 
(7,717
)
Accounts payable and accrued expenses
4,784

 
1,330

Deferred revenues
(2,742
)
 
1,285

Net cash provided by (used in) operating activities
56,338

 
41,291

Investing activities:
 
 
 
Improvements and additions to hotel properties
(43,344
)
 
(16,179
)
Proceeds from sales of hotel properties
245,096

 

Investment in marketable securities

 
(158,338
)
Purchase of corporate office equipment, software, and furniture
(6
)
 
(5
)
Property insurance proceeds

 
97

Net cash provided by (used in) investing activities
201,746

 
(174,425
)
Financing activities:
 
 
 
Payment of offering costs — common and preferred shares
(275
)
 

Payment of deferred financing costs
(105
)
 

Borrowings under revolving credit facilities
1,893

 
226,286

Repayments under revolving credit facilities
(171,893
)
 
(68,286
)
Repayments of debt
(70,614
)
 
(592
)
Repurchases of common shares
(4,009
)
 
(2,507
)
Distributions — common shares/units
(35,493
)
 
(26,753
)
Distributions — preferred shares
(8,139
)
 
(4,023
)
Proceeds from refundable membership deposits

 
36

Repayments of refundable membership deposits
(189
)
 
(337
)
Net cash provided by (used in) financing activities
(288,824
)
 
123,824

Net change in cash and cash equivalents and restricted cash
(30,740
)
 
(9,310
)
Cash and cash equivalents and restricted cash, beginning of year
107,811

 
32,533

Cash and cash equivalents and restricted cash, end of period
$
77,071

 
$
23,223

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

8


PEBBLEBROOK HOTEL TRUST
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
Pebblebrook Hotel Trust (the "Company") was formed as a Maryland real estate investment trust in October 2009 to opportunistically acquire and invest in hotel properties located primarily in major United States cities, with an emphasis on major gateway coastal markets.
As of March 31, 2019, the Company owned 61 hotels with a total of 14,575 guest rooms. The hotels are located in the following markets: Atlanta (Buckhead), Georgia; Boston, Massachusetts; Chicago, Illinois; Key West, Florida; Miami (Coral Gables), Florida; Los Angeles, California (Beverly Hills, Santa Monica, and West Hollywood); Naples, Florida; Nashville, Tennessee; New York, New York; Philadelphia, Pennsylvania; Portland, Oregon; San Diego, California; San Francisco, California; Seattle, Washington; Stevenson, Washington; and Washington, D.C.
Substantially all of the Company’s assets are held by, and all of the Company's operations are conducted through, Pebblebrook Hotel, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. At March 31, 2019, the Company owned 99.7% of the common limited partnership units issued by the Operating Partnership ("common units"). The remaining 0.3% of the common units are owned by the other limited partners of the Operating Partnership. For the Company to qualify as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), it cannot operate the hotels it owns. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to subsidiaries of Pebblebrook Hotel Lessee, Inc. (collectively with its subsidiaries, "PHL") and LaSalle Hotel Lessee Inc. (collectively with its subsidiaries, "LHL"), the Company’s taxable REIT subsidiaries ("TRSs"), which in turn engage third-party eligible independent contractors to manage the hotels. PHL and LHL are consolidated into the Company’s financial statements.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements include all adjustments considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the periods presented. Interim results are not necessarily indicative of full-year performance, as a result of the impact of seasonal and other short-term variations and the acquisitions and or dispositions of hotel properties. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The Company and its subsidiaries are separate legal entities and maintain records and books of account separate and apart from each other. The consolidated financial statements include all of the accounts of the Company and its subsidiaries and are presented in accordance with U.S. GAAP. All significant intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior period’s financial statements to conform to the current year presentation.
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.
Fair Value Measurements
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:

9



1.
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
2.
Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
3.
Level 3 – Model-derived valuations with unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company's financial instruments include cash and cash equivalents, restricted cash, accounts payable and accrued expenses. Due to their short maturities, the carrying amounts of these assets and liabilities approximate fair value. Marketable securities are carried at fair value using Level 1 inputs. See Note 5 to the accompanying financial statements for disclosures on the fair value of debt and derivative instruments.
Investment in Hotel Properties
Upon acquisition of a hotel property, the Company allocates the purchase price based on the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Identifiable intangible assets or liabilities typically arise from contractual arrangements in connection with the transaction, including terms that are above or below market compared to an estimated market agreement at the acquisition date. Acquisition-date fair values of assets and assumed liabilities are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers and that use appropriate discount and/or capitalization rates and available market information. Hotel acquisitions are generally considered to be asset acquisitions defined by ASU 2017-01 and transaction costs related to asset acquisitions are capitalized. Acquisition costs related to business combinations are expensed as incurred and are included in general and administrative expenses on the consolidated statements of operations and comprehensive income.
Hotel renovations and replacements of assets that improve or extend the life of an asset are recorded at cost and depreciated over their estimated useful lives. Assets under capital leases are recorded at the present value of the minimum lease payments. Repair and maintenance costs are expensed as incurred.
Hotel properties are recorded at cost and depreciated using the straight-line method over an estimated useful life of 10 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Intangible assets arising from contractual arrangements are typically amortized over the life of the contract. The Company is required to make subjective assessments as to the useful lives and classification of properties for purposes of determining the amount of depreciation expense to reflect each year with respect to the assets. These assessments may impact the Company’s results of operations.
The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, when a hotel property experiences a current or projected loss from operations, when it becomes more likely than not that a hotel property will be sold before the end of its useful life, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, the Company performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying value of the asset, an adjustment to reduce the carrying value to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. In the evaluation of impairment of its hotel properties, the Company makes many assumptions and estimates including projected cash flows both from operations and eventual disposition, expected useful life and holding period, future required capital expenditures, and fair values, including consideration of capitalization rates, discount rates, and comparable selling prices. The Company will adjust its assumptions with respect to the remaining useful life of the hotel property when circumstances change or it is more likely than not that the hotel property will be sold prior to its previously expected useful life.
The Company will classify a hotel as held for sale and will cease recording depreciation expense when a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, approval of the Board of Trustees has been obtained, no significant financing contingencies exist, and the sale is expected to close within one year. If the fair value less costs to sell is lower than the carrying value of the hotel, the Company will record an impairment loss. The Company will classify the loss, together with the related operating results, as continuing or

10


discontinuing operations on the consolidated statements of operations and comprehensive income and classify the assets and related liabilities as held for sale on the consolidated balance sheets.
Revenue Recognition
Revenue consists of amounts derived from hotel operations, including the sales of rooms, food and beverage, and other ancillary services. Room revenue is recognized over a customer's hotel stay. Revenue from food and beverage and other ancillary services is generated when a customer chooses to purchase goods or services separately from a hotel room and revenue is recognized on these distinct goods and services at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and the Company assesses whether it is the principal or agent in these arrangements. If the Company is the agent, revenue is recognized based upon the commission earned from the third party. If the Company is the principal, the Company recognizes revenue based upon the gross sales price. Some contracts for rooms or food and beverage services require an upfront deposit which is recorded as deferred revenues (or contract liabilities) and recognized once the performance obligations are satisfied.
The Company recognizes revenue related to nonrefundable membership initiation fees and refundable membership initiation deposits over the expected life of an active membership. For refundable membership initiation deposits, the difference between the amount paid by the member and the present value of the refund obligation is deferred and recognized as other operating revenues on the consolidated statements of operations and comprehensive income over the expected life of an active membership. The present value of the refund obligation is recorded as a membership initiation deposit liability in the consolidated balance sheets and accretes over the nonrefundable term using the effective interest method using the Company's incremental borrowing rate. The accretion is included in interest expense.
Certain of the Company's hotels have retail spaces, restaurants or other spaces which the Company leases to third parties. Lease revenue is recognized on a straight-line basis over the life of the lease and included in other operating revenues in the Company's consolidated statements of operations and comprehensive income.
The Company collects sales, use, occupancy and similar taxes at its hotels which are presented on a net basis on the consolidated statements of operations and comprehensive income. Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. The Company maintains an allowance for doubtful accounts sufficient to cover estimated potential credit losses.
Income Taxes
To qualify as a REIT for federal income tax purposes, the Company must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90 percent of its adjusted taxable income to its shareholders. As a REIT, the Company generally is not subject to federal corporate income tax on that portion of its taxable income that is currently distributed to shareholders. The Company is subject to certain state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. In addition, PHL and LHL, which leases the Company’s hotels from the Operating Partnership, is subject to federal and state income taxes. The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Share-based Compensation
The Company has adopted an equity incentive plan that provides for the grant of common share options, share awards, share appreciation rights, performance units and other equity-based awards. Equity-based compensation is measured at the fair value of the award on the date of grant and recognized as an expense on a straight-line basis over the vesting period. Share-based compensation awards that contain a performance condition are reviewed at least quarterly to assess the achievement of the performance condition. Compensation expense will be adjusted when a change in the assessment of achievement of the specific performance condition level is determined to be probable. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of the Company's shares, expected dividend yield, expected term and assumptions of whether these awards will achieve parity with other operating partnership units or achieve performance thresholds.
Earnings Per Share
Basic earnings per share (“EPS”) is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss)

11


available to common shareholders, as adjusted for dilutive securities, by the weighted-average number of common shares outstanding plus dilutive securities. Any anti-dilutive securities are excluded from the diluted per-share calculation.
Recent Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, to give companies another option for transition and to provide lessors with a practical expedient to reduce the cost and complexity of implementing the new standard. The transition option allows companies to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. The Company adopted this standard on January 1, 2019. The Company elected the practical expedients allowed under the guidance and retained the original lease classification and historical accounting for initial direct costs for leases existing prior to the adoption date. The Company also elected not to restate prior periods for the impact of the adoption of the new standard. The adoption of this standard has resulted in the recognition of right-of-use assets and related liabilities to account for the Company's future obligations under the ground lease arrangements for which the Company is the lessee. See Notes 4 and 11 to the accompanying financial statements for additional disclosures of the adoption of this standard.

Note 3. Business Combinations and Acquisition and Disposition of Hotel Properties

Merger with LaSalle Hotel Properties

On November 30, 2018, the Company completed its merger with LaSalle Hotel Properties (“LaSalle”). Pursuant to the Agreement and Plan of Merger, dated as of September 6, 2018, as amended on September 18, 2018 (the “Merger Agreement”), by and among the Company, the Operating Partnership, Ping Merger Sub, LLC (“Merger Sub”), Ping Merger OP, LP (“Merger OP”), LaSalle and LaSalle Hotel Operating Partnership, L.P. (“LaSalle OP”).

Pursuant to the Merger Agreement, on November 30, 2018, Merger OP merged with and into LaSalle OP (the “Partnership Merger”) with LaSalle OP surviving as a subsidiary of the Operating Partnership. Immediately following the Partnership Merger, LaSalle merged with and into Merger Sub (the “Company Merger” and, together with the Partnership Merger, the “Mergers”) with Merger Sub surviving as a wholly owned subsidiary of the Company. On December 3, 2018, Merger Sub assigned all of its rights and obligations to the Company and was liquidated and dissolved.

Upon completion of the Company Merger and pursuant to the Merger Agreement, each issued and outstanding LaSalle common share of beneficial interest, $0.01 par value per share ("LaSalle common shares") (other than the 10.8 million LaSalle common shares held by the Company) was converted into the right to receive either (i) 0.92 of the Company's common shares and cash in lieu of fractional shares, if any; or (ii) $37.80 in cash, subject to certain adjustments and to any applicable withholding tax (the “Cash Consideration”). The maximum number of LaSalle common shares that were eligible to be converted into the right to receive the Cash Consideration was equal to 30% of the aggregate number of LaSalle common shares issued and outstanding immediately prior to completion of the Company Merger. The LaSalle common shares held by the Company were excluded from the cash election in the Company Merger and were cancelled. In addition, each issued and outstanding LaSalle 6.375% Series I cumulative redeemable preferred share was converted into the right to receive one of the Company's 6.375% Series E cumulative redeemable preferred shares and each issued and outstanding LaSalle 6.3% Series J cumulative redeemable preferred share was converted into the right to receive one of the Company's 6.3% Series F cumulative redeemable preferred shares.

Upon completion of the Partnership Merger and pursuant to the Merger Agreement, each common unit of LaSalle OP (a “LaSalle OP Common Unit”) that was issued and outstanding immediately prior to completion of the Partnership Merger, other than LaSalle OP Common Units held by LaSalle and its subsidiaries, was cancelled and converted into the right to receive 0.92 common units of the Operating Partnership, without interest. No fractional common shares or OP units were issued in the Mergers, and the value of any fractional interests was paid in cash.
The Company accounted for the Mergers under the acquisition method of accounting in ASC 805, Business Combinations. As a result of the Mergers, the Company acquired an ownership interest in the following 36 hotel properties:

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Table of Contents

Property
 
Location
 
Ownership Interest
 
Guest Rooms
Villa Florence San Francisco on Union Square
 
San Francisco, CA
 
100
%
 
189

Hotel Vitale
 
San Francisco, CA
 
100
%
 
200

The Marker San Francisco
 
San Francisco, CA
 
100
%
 
208

Hotel Spero
 
San Francisco, CA
 
100
%
 
236

Chaminade Resort & Spa
 
Santa Cruz, CA
 
100
%
 
156

Harbor Court Hotel San Francisco
 
San Francisco, CA
 
100
%
 
131

Viceroy Santa Monica Hotel
 
Santa Monica, CA
 
100
%
 
162

Le Parc Suite Hotel
 
West Hollywood, CA
 
100
%
 
154

Hotel Amarano Burbank
 
Burbank, CA
 
100
%
 
132

Montrose West Hollywood
 
West Hollywood, CA
 
100
%
 
133

Chamberlain West Hollywood Hotel
 
West Hollywood, CA
 
100
%
 
115

Grafton on Sunset
 
West Hollywood, CA
 
100
%
 
108

The Westin Copley Place, Boston
 
Boston, MA
 
100
%
 
803

The Liberty, A Luxury Collection Hotel, Boston
 
Boston, MA
 
99.99
%
 
298

Hyatt Regency Boston Harbor
 
Boston, MA
 
100
%
 
270

Onyx Hotel
 
Boston, MA
 
100
%
 
112

Sofitel Washington DC Lafayette Square
 
Washington, DC
 
100
%
 
237

George Hotel
 
Washington, DC
 
100
%
 
139

Mason & Rook Hotel
 
Washington, DC
 
100
%
 
178

Donovan Hotel
 
Washington, DC
 
100
%
 
193

Rouge Hotel
 
Washington, DC
 
100
%
 
137

Topaz Hotel
 
Washington, DC
 
100
%
 
99

Hotel Madera
 
Washington, DC
 
100
%
 
82

Paradise Point Resort & Spa
 
San Diego, CA
 
100
%
 
462

Hilton San Diego Gaslamp Quarter
 
San Diego, CA
 
100
%
 
286

Solamar Hotel
 
San Diego, CA
 
100
%
 
235

L'Auberge Del Mar
 
Del Mar, CA
 
100
%
 
121

Hilton San Diego Resort & Spa
 
San Diego, CA
 
100
%
 
357

The Heathman Hotel
 
Portland, OR
 
100
%
 
151

Southernmost Beach Resort
 
Key West, FL
 
100
%
 
262

The Marker Key West
 
Key West, FL
 
100
%
 
96

The Roger New York
 
New York, NY
 
100
%
 
194

Hotel Chicago Downtown, Autograph Collection
 
Chicago, IL
 
100
%
 
354

The Westin Michigan Avenue Chicago
 
Chicago, IL
 
100
%
 
752

Hotel Palomar Washington DC
(1)
Washington, DC
 
100
%
 
335

The Liaison Capitol Hill
(2)
Washington, DC
 
100
%
 
343

 
 
 
 
 
 
8,420


(1) In February 2019, the Company sold this hotel property for $141.5 million.
(2) In February 2019, the Company sold this hotel property for $111.0 million.
The total consideration for the Mergers was approximately $4.1 billion, which included the Company's issuance of approximately 61.4 million common shares valued at $34.92 per share to LaSalle common shareholders, the Company's issuance of 4.4 million Series E Preferred Shares valued at $23.10 per share to former LaSalle Series I preferred shareholders and 6.0 million Series F Preferred Shares valued at $22.10 per share to former LaSalle Series J preferred shareholders, the Operating Partnership's issuance of approximately 0.1 million OP units valued at $34.92 per unit to former LaSalle limited partners, and cash. Additionally, the Company's investment of 10.8 million of LaSalle common shares valued at $346.5 million is included in the total consideration.

13

Table of Contents

The total consideration, excluding the net working capital assumed, consisted of the following (in thousands):
 
 
Total Consideration
Common shares
 
$
2,144,057

Series E preferred shares
 
101,622

Series F preferred shares
 
132,600

OP units
 
4,665

Cash
 
1,719,150

Total consideration
 
$
4,102,094


The Company preliminarily allocated the purchase price as follows (in thousands):

 
 
November 30, 2018
Investment in hotel properties
 
$
4,120,370

Restricted cash reserves
 
14,784

Hotel and other receivables
 
34,669

Intangible assets
 
171,660

Prepaid expenses and other assets
 
47,808

Accounts payable and accrued expenses
 
(258,036
)
Deferred revenues
 
(23,816
)
Accrued interest
 
(2,496
)
Distributions payable
 
(2,744
)
Other
 
(105
)
Total consideration
 
$
4,102,094


The estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available. These estimated fair values are based on a valuation prepared by the Company with assistance of a third-party valuation specialist. The Company reviewed the inputs used by the third-party specialist as well as the allocation of the purchase price to ensure reasonableness. The Company and the third party valuation specialist have prepared the fair value estimates for each of the hotel properties acquired, and continue reviewing the underlying inputs and assumptions; therefore, the purchase price and its allocation, in their entirety, are not yet complete as of the date of this filing. Once the purchase price and allocation are complete, additional adjustment to the purchase price or allocation may occur.
The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the equity interests acquired:
Investment in hotel properties — The Company estimated the fair values of the land and improvements, buildings and improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the market, cost, and income approaches. These valuation methodologies are based on significant Level 2 and Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures, and cash flow projections at the respective hotel properties.
Intangible assets — The Company estimated the fair value of its lease intangible assets by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancellable term of the lease. This valuation methodology is based on Level 2 and Level 3 inputs in the fair value hierarchy. The market lease intangible assets are amortized as adjustments to ground rent expense over the remaining terms of the respective leases.
Above market lease liabilities — The Company estimated the fair value of its above market lease liabilities by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancellable term of the lease. This valuation methodology is based on Level 2 and Level 3 inputs in the fair value

14

Table of Contents

hierarchy. The above market lease liabilities are included in accounts payable and other liabilities in the accompanying consolidated balance sheet. The above market lease liabilities are amortized as adjustments to ground rent expense over the remaining terms of the respective leases.
Restricted cash reserves, hotel and other receivables, prepaid expenses and other assets, accounts payable and other liabilities, deferred revenues, accrued interest, and distributions payable — the carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.
For the hotel properties acquired during the Mergers, total revenues and operating income of $184.0 million and $63.2 million, respectively, for the three months ended March 31, 2019 are included in the accompanying consolidated statements of operations and comprehensive income.
There were no acquisitions of hotel properties during the three months ended March 31, 2019. For the three months ended March 31, 2019, the Company incurred $0.2 million in transaction costs and $2.2 million in integration costs in connection with the Mergers. The transaction costs primarily related to transfer taxes, financial advisory fees, loan commitment fees, legal, and other professional service fees in connection with the Mergers. The integration costs primarily related to professional fees and employee-related costs. The merger-related costs noted above are included in transaction costs in the accompanying consolidated statements of operations and comprehensive income.
The following unaudited condensed pro forma financial information presents the results of operations as if the Mergers had taken place on January 1, 2017. The unaudited condensed pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Mergers had taken place on January 1, 2017, nor is it indicative of the results of operations for future periods. The unaudited condensed pro forma financial information is as follows (in thousands):
 
 
For the three months ended March 31,
 
 
2019
 
2018
 
 
(unaudited)
Total revenues
 
$
367,169

 
$
364,160

Operating income (loss)
 
$
29,937

 
$
41,729

Net income (loss) attributable to common shareholders
 
$
(2,504
)
 
$
9,315

Net income (loss) per share available to common shareholders — basic
 
$
(0.02
)
 
$
0.07

Net income (loss) per share available to common shareholders — diluted
 
$
(0.02
)
 
$
0.07


Disposition of Hotel Properties
The Company will report a disposed or held for sale hotel property or group of hotel properties in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on its operations and financial results. All other disposed hotel properties will have their operating results reflected within continuing operations on the Company's consolidated statements of operations and comprehensive income for all periods presented.
On February 14, 2019, the Company sold The Liaison Capitol Hill for $111.0 million and recognized no gain or loss on the disposition.
On February 22, 2019, the Company sold the Hotel Palomar Washington DC for $141.5 million and recognized no gain or loss on the disposition.
For the three months ended March 31, 2019 and 2018, the Company's consolidated statements of operations and comprehensive income included operating (loss) income of $(0.1) million and $0.9 million, respectively, related to The Grand Hotel Minneapolis, The Liaison Capitol Hill and the Hotel Palomar Washington DC.
The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results, and therefore, did not qualify as discontinued operations.

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Table of Contents

Note 4. Investment in Hotel Properties
Investment in hotel properties as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):
 
 
March 31,
2019
 
December 31, 2018
Land
$
1,029,685

 
$
1,056,862

Buildings and improvements
5,278,223

 
5,440,513

Furniture, fixtures and equipment
459,245

 
462,620

Right-of-use asset, operating leases
325,464

 

Capital lease asset
91,985

 
91,985

Construction in progress
24,406

 
25,643

Investment in hotel properties
$
7,209,008

 
$
7,077,623

Less: Accumulated depreciation
(593,750
)
 
(543,430
)
Investment in hotel properties, net
$
6,615,258

 
$
6,534,193


On January 1, 2019, the Company adopted ASU 842, Leases and applied it prospectively. At adoption, the Company also elected the practical expedients which permitted it to not reassess its prior conclusions about lease identification, classification, and initial direct costs. Consequently on January 1, 2019, the Company recognized right-of-use assets and related liabilities related to its ground leases, all of which are operating leases. Since most of the Company's leases do not provide an implicit rate, the Company used incremental borrowing rates, which ranged from 5.5% to 7.6%. All of of these ground leases have long terms, ranging from 10 years to 88 years and the Company included the exercise of options to extend when it is reasonably certain the Company will exercise such option. See Note 11 for additional information about the ground leases. The right-of-use assets and liabilities are amortized to ground rent expense over the term of the underlying lease agreements. As of March 31, 2019, the Company's right-of-use assets of $325.5 million, which included favorable and unfavorable intangibles, are included in the Investment in Hotel Properties and its related lease liabilities of $247.2 million are presented in Accounts Payable and Accrued Expenses in the Company's consolidated balance sheets. The adoption of this standard had minimal impact on the Company's statements of operations and comprehensive income.

On September 10, 2017, Hotel Colonnade Coral Gables, a Tribute Portfolio Hotel ("Hotel Colonnade") located in Coral Gables, Florida and LaPlaya Beach Resort and Club ("LaPlaya") located in Naples, Florida were impacted by Hurricane Irma. Hotel Colonnade did not suffer any material damage and remained open. LaPlaya was closed in anticipation of the storm and re-opened in stages beginning in the fourth quarter of 2017 and was fully reopened in January 2018.

The Company’s insurance policies provide coverage for property damage, business interruption, and reimbursement for other costs that were incurred relating to damages sustained during Hurricane Irma. Insurance proceeds are subject to deductibles. As of June 30, 2018, the Company reached a final agreement with the insurance carriers related to LaPlaya totaling $20.5 million, and the Company recognized a gain of $0.0 million and $4.9 million for the three months ended March 31, 2019 and 2018, respectively.

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Table of Contents

Note 5. Debt
The Company's debt consisted of the following as of March 31, 2019 and December 31, 2018 (dollars in thousands):
 
 

 

Balance Outstanding as of
 
Interest Rate

Maturity Date

March 31, 2019

December 31, 2018
Revolving credit facilities
 
 
 
 
 
 
 
Senior unsecured credit facility
Floating (1)

January 2022

$


$
170,000

PHL unsecured credit facility
Floating (2)

January 2022




Total revolving credit facilities
 
 
 
 
$

 
$
170,000

 
 
 
 
 
 
 
 
Unsecured term loans









First Term Loan
Floating (3)

January 2023

300,000


300,000

Second Term Loan
Floating (3)

April 2022

65,000


65,000

Third Term Loan
Floating (3)

January 2021

200,000


200,000

Fourth Term Loan
Floating (3)
 
October 2024
 
110,000

 
110,000

Sixth Term Loan
 
 
 
 
 
 
 
Tranche 2020
Floating (3)
 
December 2020
 
180,000

 
250,000

Tranche 2021
Floating (3)
 
November 2021
 
300,000

 
300,000

Tranche 2022
Floating (3)
 
November 2022
 
400,000

 
400,000

Tranche 2023
Floating (3)
 
November 2023
 
400,000

 
400,000

Tranche 2024
Floating (3)
 
January 2024
 
400,000

 
400,000

Total Sixth Term Loan
 
 
 
 
1,680,000

 
1,750,000

Total term loans at stated value




2,355,000


2,425,000

Deferred financing costs, net




(14,681
)

(15,716
)
Total term loans




$
2,340,319


$
2,409,284











Senior unsecured notes









Series A Notes
4.70%

December 2023

60,000


60,000

Series B Notes
4.93%

December 2025

40,000


40,000

Total senior unsecured notes at stated value




100,000


100,000

Deferred financing costs, net




(507
)

(531
)
Total senior unsecured notes




$
99,493


$
99,469











Mortgage loans









The Westin San Diego Gaslamp Quarter
3.69%

January 2020

67,593


68,207

Deferred financing costs, net




(47
)

(62
)
Total mortgage loans




$
67,546


$
68,145

Total debt




$
2,507,358


$
2,746,898

 
________________________ 
(1) Borrowings bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) an Adjusted Base Rate (as defined in the applicable credit agreement) plus an applicable margin.
(2) Borrowings bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) an Eurocurrency Rate (as defined in the applicable credit agreement) plus an applicable margin.
(3) Borrowings under the term loan facilities bear interest at floating rates equal to, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an applicable margin.

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Table of Contents

Unsecured Revolving Credit Facilities
The Company has a $650.0 million senior unsecured revolving credit facility maturing in January 2022, with options to extend the maturity date to January 2023, pursuant to certain terms and conditions and payment of an extension fee. As of March 31, 2019, the Company had zero outstanding borrowings and $650.0 million borrowing capacity remaining on its senior unsecured credit facility. Interest is paid on the periodic advances under the senior unsecured revolving credit facility at varying rates, based upon either LIBOR or the alternate base rate, plus an additional margin amount. The Company has the ability to further increase the aggregate borrowing capacity under the credit agreement to up to $1.3 billion, subject to lender approval. Borrowings on the revolving credit facility bear interest at LIBOR plus 1.45% to 2.25%, depending on the Company’s leverage ratio. Additionally, the Company is required to pay an unused commitment fee at an annual rate of 0.20% or 0.30% of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a minimum fixed charge coverage ratio, and a maximum percentage of secured debt to total asset value.

The Company also has a $10.0 million unsecured revolving credit facility (the "PHL Credit Facility") to be used for PHL's working capital and general corporate purposes. This credit facility has substantially similar terms as the Company's senior unsecured revolving credit facility and matures in January 2022. Borrowings on the PHL Credit Facility bear interest at LIBOR plus 1.45% to 2.25%, depending on the Company's leverage ratio. The PHL Credit Facility is subject to debt covenants substantially similar to the covenants under the Company's credit agreement that governs the Company's senior unsecured revolving credit facility. As of March 31, 2019, the Company had no borrowings under the PHL Credit Facility and had $10.0 million borrowing capacity remaining under the PHL Credit Facility.

Under the terms of the credit agreement for the unsecured revolving credit facility, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $30.0 million, may be issued on behalf of the Company by the lenders under the unsecured revolving credit facility.  The Company will incur a fee that shall be agreed upon with the issuing bank.  Any outstanding standby letters of credit reduce the available borrowings on the senior unsecured revolving credit facility by a corresponding amount. Standby letters of credit of $2.3 million and zero were outstanding as of March 31, 2019 and December 31, 2018, respectively.

As of March 31, 2019, the Company was in compliance with the debt covenants of the credit agreements that govern the unsecured revolving credit facilities.
Unsecured Term Loan Facilities
The Company has senior unsecured term loans with different maturities. Each unsecured term loan bears interest at a variable rate of a benchmark interest rate plus an applicable margin, depending on the Company's leverage ratio. Each of the term loan facilities is subject to debt covenants substantially similar to the covenants under the credit agreement that governs the revolving credit facility. In February 2019, the Company repaid $70.0 million of the tranche maturing in 2020 of the Company's sixth term loan. As of March 31, 2019, the Company was in compliance with all debt covenants of its term loan facilities. The Company entered into interest rate swap agreements to fix the LIBOR rate on a portion of these unsecured term loan facilities, see Derivative and Hedging Activities below.
Senior Unsecured Notes
The Company has outstanding $60.0 million of senior unsecured notes bearing a fixed interest rate of 4.70% per annum and maturing in December 2023 (the "Series A Notes") and $40.0 million of senior unsecured notes bearing a fixed interest rate of 4.93% per annum and maturing in December 2025 (the "Series B Notes"). The debt covenants of the Series A Notes and the Series B Notes are substantially similar to those of the Company's senior unsecured revolving credit facility. As of March 31, 2019, the Company was in compliance with all such debt covenants.
Mortgage Debt
The Company’s sole mortgage loan is secured by a first mortgage lien on the underlying hotel property. The mortgage is non-recourse to the Company except for customary carve-outs such as fraud or misapplication of funds.
Interest Expense
The components of the Company's interest expense consisted of the following (in thousands):
 

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Table of Contents

 
 
For the three months ended March 31,
 
 
2019
 
2018
Unsecured revolving credit facilities
 
$
1,400

 
$
1,485

Unsecured term loan facilities
 
21,865

 
5,522

Senior unsecured notes
 
1,198

 
1,198

Mortgage debt
 
626

 
647

Amortization of deferred financing fees
 
1,488

 
517

Other
 
2,751

 
442

Total interest expense
 
$
29,328

 
$
9,811

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates, taking into consideration general market conditions and maturity of the debt with similar credit terms and is classified within Level 2 of the fair value hierarchy. The estimated fair value of the Company’s fixed rate debt (unsecured senior notes and mortgage loans) as of March 31, 2019 and December 31, 2018 was $165.1 million and $164.3 million, respectively.
Derivative and Hedging Activities
The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. All of the Company's interest rate swaps are cash flow hedges. On January 1, 2018, the Company adopted ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. All unrealized gains and losses on these hedging instruments are reported in accumulated other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

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Table of Contents

The Company's interest rate swaps at March 31, 2019 and December 31, 2018 consisted of the following (in thousands):
 
 
 
 
 
 
Notional Value as of
Hedge Type
 
Interest Rate
 
Maturity
 
March 31, 2019
 
December 31, 2018
Swap - cash flow
 
1.57%
(1) 
May 2019
 
$
100,000


$
100,000

Swap - cash flow
 
1.57%
(1) 
May 2019
 
62,500


62,500

Swap - cash flow
 
1.57%
(1) 
May 2019
 
15,000


15,000

Swap - cash flow
 
1.63%
 
January 2020
 
50,000


50,000

Swap - cash flow
 
1.63%
 
January 2020
 
50,000


50,000

Swap - cash flow
 
2.46%
 
January 2020
 
50,000


50,000

Swap - cash flow
 
2.46%
 
January 2020
 
50,000


50,000

Swap - cash flow
 
1.66%
 
January 2020
 
50,000


50,000

Swap - cash flow
 
1.66%
 
January 2020
 
50,000


50,000

Swap - cash flow
 
1.74%
 
January 2021
 
75,000


75,000

Swap - cash flow
 
1.75%
 
January 2021
 
50,000


50,000

Swap - cash flow
 
1.53%
 
January 2021
 
37,500


37,500

Swap - cash flow
 
1.53%
 
January 2021
 
37,500


37,500

Swap - cash flow
 
1.46%
(1) 
January 2021
 
100,000


100,000

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500


47,500

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500


47,500

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500


47,500

Swap - cash flow
 
1.47%
(1) 
January 2021
 
47,500


47,500

Swap - cash flow
 
2.60%
(2) 
October 2021
 
55,000


55,000

Swap - cash flow
 
2.60%
(2) 
October 2021
 
55,000


55,000

Swap - cash flow
 
1.78%
(1) 
January 2022
 
100,000


100,000

Swap - cash flow
 
1.78%
(1) 
January 2022
 
50,000


50,000

Swap - cash flow
 
1.79%
(1) 
January 2022
 
30,000


30,000

Swap - cash flow
 
1.68%
 
April 2022
 
25,000


25,000

Swap - cash flow
 
1.68%
 
April 2022
 
25,000


25,000

Swap - cash flow
 
1.64%
 
April 2022
 
25,000


25,000

Swap - cash flow
 
1.64%
 
April 2022
 
25,000


25,000

Swap - cash flow
 
2.60%
(3) 
January 2024
 
75,000


75,000

Swap - cash flow
 
2.60%
(3) 
January 2024
 
50,000


50,000

Swap - cash flow
 
2.60%
(3) 
January 2024
 
25,000


25,000

Swap - cash flow
 
2.60%
(3) 
January 2024
 
75,000


75,000

Swap - cash flow
 
2.60%
(3) 
January 2024
 
75,000


75,000

________________________ 
(1) Swaps assumed in connection with the LaSalle merger on November 30, 2018.
(2) Swaps became effective January 2019.
(3) Swaps will be effective January 2020.
The Company records all derivative instruments at fair value in the consolidated balance sheets. Fair values of interest rate swaps are determined using the standard market methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Variable interest rates used in the calculation of projected receipts and payments on the swaps are based on an expectation of future interest rates derived from observable market interest rate curves (Overnight Index Swap curves) and volatilities (Level 2 inputs). Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company incorporates these counterparty credit risks in its fair value measurements. The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions.

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As of March 31, 2019, the Company's derivative instruments were in both asset and liability positions, with an aggregate asset and liability fair values of $11.1 million and $6.8 million, respectively, in the accompanying consolidated balance sheets. For the three months ended March 31, 2019 and 2018, there was $(9.0) million and $5.3 million in unrealized (loss) gain, respectively, recorded in accumulated other comprehensive income (loss). For the three months ended March 31, 2019 and 2018, the Company reclassified $(2.5) million and $0.3 million, respectively, from accumulated other comprehensive income (loss) to interest expense. The Company expects approximately $1.2 million will be reclassified from accumulated other comprehensive income (loss) to interest expense in the next 12 months.
Note 6. Revenue
The Company presents revenue on a disaggregated basis in the consolidated statements of operations and comprehensive income. The following table presents revenues by geographic location for the three months ended March 31, 2019 and 2018 (in thousands):
 
 
For the three months ended March 31,
 
 
2019
 
2018
San Francisco, CA
 
$
83,243

 
$
44,448

Los Angeles, CA
 
47,364

 
29,729

San Diego, CA
 
57,288

 
17,129

Boston, MA
 
47,532

 
12,318

Seattle, WA
 
6,641

 
6,421

Portland, OR
 
18,703

 
18,412

Washington DC
 
27,928

 
5,385

Southern FL
 
39,530

 
20,983

Chicago, IL
 
11,099

 

Other (1)
 
27,841

 
26,230

 
 
$
367,169

 
$
181,055

(1) Other includes: Atlanta (Buckhead), GA, Minneapolis, MN, Nashville, TN, New York City, NY, Philadelphia, PA and Santa Cruz, CA.
Payments from customers are primarily made when services are provided. Due to the short-term nature of the Company's contracts and the almost simultaneous receipt of payment, almost all of the contract liability balance at the beginning of the year is expected to be recognized as revenue over the following 12 months.
Note 7. Equity
Common Shares
The Company is authorized to issue up to 500,000,000 common shares of beneficial interest, $0.01 par value per share (“common shares”). Each outstanding common share entitles the holder to one vote on each matter submitted to a vote of shareholders. Holders of the Company’s common shares are entitled to receive dividends when authorized by the Company's Board of Trustees.
On February 22, 2016, the Company announced that the Board of Trustees authorized a share repurchase program of up to $150.0 million of the Company's outstanding common shares. Under this program, the Company may repurchase its common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. Upon repurchase by the Company, common shares cease to be outstanding and become authorized but unissued common shares. For the three months ended March 31, 2019, the Company had no repurchases under this program and as of March 31, 2019, $56.6 million of common shares remained available for repurchase under this program.
On July 27, 2017, the Company announced that the Board of Trustees authorized a new share repurchase program of up to $100.0 million of the Company's outstanding common shares. Under this program, the Company may repurchase its common shares from time to time in transactions on the open market or by private agreement. The Company may suspend or discontinue this program at any time. This $100.0 million share repurchase program will commence upon completion of the Company's $150.0 million share repurchase program.

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Common Dividends
The Company declared the following dividends on common shares/units for the three months ended March 31, 2019:
Dividend per
Share/Unit
 
For the Quarter
Ended
 
Record Date
 
Payable Date
$
0.38

 
March 31, 2019
 
March 29, 2019
 
April 15, 2019
Preferred Shares
The Company is authorized to issue up to 100,000,000 preferred shares of beneficial interest, $0.01 par value per share (“preferred shares”).
On November 30, 2018, in connection with the LaSalle merger, the Company issued 4,400,000 of its 6.375% Series E Cumulative Redeemable Preferred Shares ("Series E Preferred Shares") and 6,000,000 of its 6.30% Series F Cumulative Redeemable Preferred Shares ("Series F Preferred Shares").
The following Preferred Shares were outstanding as of March 31, 2019 and December 31, 2018:
Security Type
 
As of March 31, 2019
 
As of December 31, 2018
6.50% Series C
 
5,000,000

 
5,000,000

6.375% Series D
 
5,000,000

 
5,000,000

6.375% Series E
 
4,400,000

 
4,400,000

6.30% Series F
 
6,000,000

 
6,000,000

 
 
20,400,000

 
20,400,000

The Series C Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares and on parity with each other with respect to payment of distributions. The Preferred Shares are cumulative redeemable preferred shares, do not have any maturity date and are not subject to mandatory redemption. The Company could not redeem the Series C Preferred Shares prior to March 18, 2018, may not redeem the Series D Preferred Shares prior to June 9, 2021, could not redeem the Series E Preferred Shares prior to March 4, 2018 and may not redeem the Series F Preferred Shares prior to May 25, 2021, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. On or after May 25, 2021 and June 9, 2021, the Company may, at its option, redeem the Series F Preferred Shares and Series D Preferred Shares, respectively, and at any time the Company may, at its option, redeem the Series C Preferred Shares or the Series E Preferred Shares, or both, in each case in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions through the date of redemption. Upon the occurrence of a change of control, as defined in the Company's declaration of trust, the result of which the Company’s common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT or NASDAQ, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days following the change of control by paying $25.00 per share, plus any accrued and unpaid distributions through the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on defined formulas subject to share caps. The share cap on each Series C Preferred Share is 2.0325 common shares, on each Series D Preferred Share is 1.9794 common shares, on each Series E Preferred Share is 1.9372 common shares and on each Series F Preferred Share is 2.0649 common shares.
Preferred Dividends
The Company declared the following dividends on preferred shares for the three months ended March 31, 2019:
 
Security Type
 
Dividend  per
Share/Unit
 
For the Quarter
Ended
 
Record Date
 
Payable Date
6.50% Series C
 
$
0.41

 
March 31, 2019
 
March 29, 2019
 
April 15, 2019
6.375% Series D
 
$
0.40

 
March 31, 2019
 
March 29, 2019
 
April 15, 2019
6.375% Series E
 
$
0.40

 
March 31, 2019
  
March 29, 2019
 
April 15, 2019
6.30% Series F
 
$
0.39

 
March 31, 2019
  
March 29, 2019
 
April 15, 2019

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Non-controlling Interest of Common Units in Operating Partnership
Holders of Operating Partnership units have certain redemption rights that enable the unit holders to cause the Operating Partnership to redeem their units in exchange for, at the Company’s option, cash per unit equal to the market price of the Company’s common shares at the time of redemption or the Company’s common shares on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the Operating Partnership's limited partners or the Company's shareholders.
As of March 31, 2019 and December 31, 2018, the Operating Partnership had 236,351 long-term incentive partnership units (“LTIP units”) outstanding. Of the 236,351 LTIP units outstanding at March 31, 2019, 190,975 LTIP units have vested. Only vested LTIP units may be converted to common units of the Operating Partnership, which in turn can be tendered for redemption as described above.
On November 30, 2018, in connection with the LaSalle merger, the Company issued 133,605 OP units in the Operating Partnership to third-party limited partners of LaSalle OP. As of March 31, 2019 and December 31, 2018, the Operating Partnership had 133,605 and 133,605 OP units held by third parties, respectively, excluding LTIP units.
Note 8. Share-Based Compensation Plan
The Company maintains the 2009 Equity Incentive Plan, as amended and restated (as amended, the "Plan"), to attract and retain independent trustees, executive officers and other key employees and service providers. The Plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. Share awards under the Plan vest over a period determined by the Board of Trustees, generally over three to five years, with certain awards vesting over periods of up to six years. The Company pays or accrues for dividends on share-based awards. All share awards are subject to full or partial accelerated vesting upon a change in control and upon death or disability or certain other employment termination events as set forth in the award agreements. As of March 31, 2019, there were 1,037,919 common shares available for issuance under the Plan, assuming performance-based equity awards vest at target.
Service Condition Share Awards
From time to time, the Company awards restricted common shares under the Plan to members of the Board of Trustees, officers and employees. These shares generally vest over three to five years based on continued service or employment.
The following table provides a summary of service condition restricted share activity as of March 31, 2019:
 
 
Shares
 
Weighted-Average
Grant Date
Fair Value
Unvested at December 31, 2018
127,732

 
$
32.22

Granted
84,705

 
$
32.70

Vested
(66,276
)
 
$
30.20

Forfeited

 
$

Unvested at March 31, 2019
146,161

 
$
33.41

The fair value of each of these service condition restricted share awards is determined based on the closing price of the Company’s common shares on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. For the three months ended March 31, 2019 and 2018, the Company recognized approximately $0.5 million and $0.4 million, respectively, of share-based compensation expense related to these service condition restricted shares in the consolidated statements of operations and comprehensive income. As of March 31, 2019, there was $4.4 million of total unrecognized share-based compensation expense related to unvested restricted shares. The unrecognized share-based compensation expense is expected to be recognized over the weighted-average remaining vesting period of 2.2 years.
Performance-Based Equity Awards

On December 13, 2013, the Board of Trustees approved a target award of 252,088 performance-based equity awards to officers and employees of the Company. The awards vest ratably, if at all, on January 1, 2016, 2017, 2018, 2019 and 2020. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award and will be determined on each vesting date based upon the two performance criteria defined in the award agreements for the period of performance beginning on the grant date and ending on the applicable vesting date. In January 2016, the Company issued 25,134 of common shares which represented achieving 49% of the 50,418 target number of shares for that measurement period.

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In January 2017, the Company issued 12,285 of common shares which represented achieving 25% of the 49,914 target number of shares for that measurement period. In January 2018, the Company issued 72,236 of common shares which represented achieving 145% of the 49,914 target number of shares for that measurement period. In January 2019, the Company issued 35,471 of common shares which represented achieving 71% of the 49,914 target number of shares for that measurement period.
On February 4, 2014, the Board of Trustees approved a target award of 66,483 performance-based equity awards to officers and employees of the Company. In January 2017, these awards vested and the Company issued 112,782 and 25,619 common shares to officers and non-executive management employees, respectively. The actual number of common shares that ultimately vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2014 through December 31, 2016.
On February 11, 2015, the Board of Trustees approved a target award of 44,962 performance-based equity awards to officers and employees of the Company. In January 2018, these awards vested and the Company issued 14,089 and 2,501 common shares to officers and non-executive management employees, respectively. The actual number of common shares that ultimately vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2015 through December 31, 2017.
On July 27, 2015, a target award of 771 performance-based equity awards was granted to an employee of the Company. In January 2018, these awards vested and the Company issued 1,079 common shares to the employee. The actual number of common shares that ultimately vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2016 through December 31, 2017.
On February 10, 2016, the Board of Trustees approved a target award of 100,919 performance-based equity awards to officers and employees of the Company. In January 2019, these awards vested and the Company issued 142,173 and 31,146 common shares to officers and employees, respectively. The actual number of common shares that ultimately vested was based on the three performance criteria defined in the award agreements for the period of performance from January 1, 2016 through December 31, 2018.
On February 15, 2017, the Board of Trustees approved a target award of 81,939 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2020. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award and will be determined in 2020 based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2017 through December 31, 2019.
On February 14, 2018, the Board of Trustees approved a target award of 78,918 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2021. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award and will be determined in 2021 based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2018 through December 31, 2020.
On February 13, 2019, the Board of Trustees approved a target award of 126,891 performance-based equity awards to officers and employees of the Company. These awards will vest, if at all, in 2022. The actual number of common shares that ultimately vest will range from 0% to 200% of the target award and will be determined in 2022 based on the two performance criteria defined in the award agreements for the period of performance from January 1, 2019 through December 31, 2021.
The grant date fair value of the performance awards, with market conditions, were determined using a Monte Carlo simulation method with the following assumptions:

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Table of Contents

Performance Award Grant Date
 
Percentage of Total Award
 
Grant Date Fair Value by Component ($ in millions)
 
Volatility
 
Interest Rate
 
Dividend Yield
December 13, 2013
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
50.00%
 
$4.7
 
29.00%
 
0.34% - 2.25%
 
2.40%
 
Absolute Total Shareholder Return
 
50.00%
 
$2.9
 
29.00%
 
0.34% - 2.25%
 
2.40%
 
 
 
 
 
 
 
 
 
 
 
 
February 4, 2014
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
$0.7
 
29.00%
 
0.62%
 
2.40%
 
Absolute Total Shareholder Return
 
30.00%
 
$0.5
 
29.00%
 
0.62%
 
2.40%
 
EBITDA Comparison
 
40.00%
 
$0.8
 
29.00%
 
0.62%
 
2.40%
 
 
 
 
 
 
 
 
 
 
 
 
February 11, 2015
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
$0.9
 
22.00%
 
1.02%
 
2.50%
 
Absolute Total Shareholder Return
 
40.00%
 
$0.7
 
22.00%
 
1.02%
 
2.50%
 
EBITDA Comparison
 
30.00%
 
$0.7
 
22.00%
 
1.02%
 
2.50%
 
 
 
 
 
 
 
 
 
 
 
 
July 27, 2015
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
30.00%
 
(1) 
22.00%
 
0.68%
 
2.50%
 
Absolute Total Shareholder Return
 
40.00%
 
(1) 
22.00%
 
0.68%
 
2.50%
 
EBITDA Comparison
 
30.00%
 
(1) 
22.00%
 
0.68%
 
2.50%
 
 
 
 
 
 
 
 
 
 
 
 
February 10, 2016
 
 
 
 
 
 
 
 
 
 
 
Relative Total Shareholder Return
 
70.00%
 
$1.6
 
25.00%
 
0.71%
 
3.00%
 
Absolute Total Shareholder Return
 
15.00%
 
$0.2
 
25.00%
 
0.71%
 
3.00%
 
EBITDA Comparison
 
15.00%
 
$0.4
 
25.00%
 
0.71%
 
3.00%
 
 
 
 
 
 
 
 
 
 
 
 
February 15, 2017
 
 
 
 
 
 
 
 
 
 
 
Relative and Absolute Total Shareholder Return
 
65.00% / 35.00%
 
$2.7
 
28.00%
 
1.27%
 
5.60%
 
 
 
 
 
 
 
 
 
 
 
 
February 14, 2018
 
 
 
 
 
 
 
 
 
 
 
Relative and Absolute Total Shareholder Return
 
65.00% / 35.00%
 
$3.5
 
28.00%
 
2.37%
 
4.70%
 
 
 
 
 
 
 
 
 
 
 
 
February 13, 2019
 
 
 
 
 
 
 
 
 
 
 
Relative and Absolute Total Shareholder Return
 
65.00% / 35.00%
 
$4.5
 
26.00%
 
2.52%
 
4.20%
(1)Amounts round to zero.

In the table above, the Relative Total Shareholder Return and Absolute Total Shareholder Return components are market conditions as defined by ASC 718. The EBITDA Comparison component is a performance condition as defined by ASC 718, and, therefore, compensation expense related to this component will be reassessed at each reporting date based on the Company's estimate of the probable level of achievement, and the accrual of compensation expense will be adjusted as appropriate.
 
Dividends on unvested performance-based equity awards accrue over the vesting period and will be paid on the actual number of shares that vest at the end of the applicable period. The Company recognizes compensation expense on a straight-

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line basis through the vesting date. As of March 31, 2019, there was approximately $8.3 million of unrecognized compensation expense related to these performance-based equity awards which will be recognized over the weighted-average remaining vesting period of 2.1 years. For the three months ended March 31, 2019 and 2018, the Company recognized $1.1 million and $(1.0) million, respectively, in expense related to these awards.
Long-Term Incentive Partnership Units
LTIP units, which are also referred to as profits interest units, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. LTIP units are a class of partnership unit in the Operating Partnership and receive, whether vested or not, the same per-unit profit distributions as the other outstanding units in the Operating Partnership, which equal per-share distributions on common shares. LTIP units are allocated their pro-rata share of the Company's net income (loss). Vested LTIP units may be converted by the holder, at any time, into an equal number of common Operating Partnership units and thereafter will possess all of the rights and interests of a common Operating Partnership unit, including the right to redeem the common Operating Partnership unit for a common share in the Company or cash, at the option of the Operating Partnership.
As of March 31, 2019, the Operating Partnership had two classes of LTIP units, LTIP Class A and LTIP Class B units. All of the outstanding LTIP units are held by officers of the Company.
On December 13, 2013, the Board of Trustees approved a grant of 226,882 LTIP Class B units to executive officers of the Company. These LTIP units are subject to time-based vesting in five equal annual installments beginning January 1, 2016 and ending on January 1, 2020. The fair value of each award was determined based on the closing price of the Company’s common shares on the grant date of $29.19 per unit. The aggregate grant date fair value of the LTIP Class B units was $6.6 million.
As of March 31, 2019, the Company had 236,351 LTIP units outstanding. All unvested LTIP units will vest upon a change in control. As of March 31, 2019, of the 236,351 units outstanding, 190,975 LTIP units have vested.
For the three months ended March 31, 2019 and 2018, the Company recognized $0.3 million and $0.3 million, respectively, in expense related to these LTIP units. As of March 31, 2019, there was $0.8 million of total unrecognized share-based compensation expense related to LTIP units. This unrecognized share-based compensation expense is expected to be recognized over the weighted-average remaining vesting period of 0.4 years. The aggregate expense related to the LTIP unit grants is presented as non-controlling interest in the Company’s consolidated balance sheets.
Note 9. Income Taxes
The Company's TRSs, PHL and LHL, are subject to federal and state corporate income taxes at statutory tax rates. The Company has estimated its TRSs' income tax expense (benefit) for the three months ended March 31, 2019 using an estimated combined federal and state statutory tax rate of 30.0%.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and local jurisdictions, where applicable. As of March 31, 2019 and December 31, 2018, the statute of limitations remains open for all major jurisdictions for tax years dating back to 2014.

Note 10. Earnings Per Share
The following is a reconciliation of basic and diluted earnings per common share (in thousands, except share and per-share data):

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Table of Contents

 
For the three months ended March 31,
 
2019
 
2018
Numerator:
 
 
 
Net income (loss) attributable to common shareholders
$
(2,504
)
 
$
20,386

Less: dividends paid on unvested share-based compensation
(73
)
 
(83
)
Net income (loss) available to common shareholders
$
(2,577
)
 
$
20,303

Denominator:
 
 
 
Weighted-average number of common shares — basic
130,431,074

 
68,876,444

Effect of dilutive share-based compensation

 
331,604

Weighted-average number of common shares — diluted
130,431,074

 
69,208,048

 
 
 
 
Net income (loss) per share available to common shareholders — basic
$
(0.02
)
 
$
0.29

Net income (loss) per share available to common shareholders — diluted
$
(0.02
)
 
$
0.29

For the three months ended March 31, 2019 and 2018, 179,476 and 4,212, respectively, of unvested service condition restricted shares and performance-based equity awards were excluded from diluted weighted-average common shares, as their effect would have been anti-dilutive. The LTIP and OP units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income (loss) would also be added or subtracted to derive net income (loss) available to common shareholders.
Note 11. Commitments and Contingencies
Management Agreements
The Company’s hotel properties are operated pursuant to management agreements with various management companies. The terms of these management agreements range from 1 year to 22 years, not including renewals, and 1 year to 52 years, including renewals. Many of the Company’s management agreements are terminable at will by the Company upon paying a termination fee and some are terminable by the Company upon sale of the property, with, in some cases, the payment of termination fees. Most of the agreements also provide the Company the ability to terminate based on failure to achieve defined operating performance thresholds. Termination fees range from zero to up to seven times the annual base management and incentive management fees, depending on the agreement and the reason for termination. Certain of the Company’s management agreements are non-terminable except upon the manager’s breach of a material representation or the manager’s failure to meet performance thresholds as defined in the management agreement.
The management agreements require the payment of a base management fee generally between 1% and 4% of hotel revenues. Under certain management agreements, the management companies are also eligible to receive an incentive management fee if hotel operating income, cash flows or other performance measures, as defined in the agreements, exceed certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. Combined base and incentive management fees were $9.5 million and $5.3 million for the three months ended March 31, 2019 and 2018, respectively. Base and incentive management fees are included in other direct and indirect expenses in the Company's consolidated statements of operations and comprehensive income.
Reserve Funds
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, typically 4.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment.

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Table of Contents

Restricted Cash
At March 31, 2019 and December 31, 2018, the Company had $25.7 million and $24.4 million, respectively, in restricted cash, which consisted of reserves for replacement of furniture and fixtures or reserves to pay for real estate taxes or property insurance under certain hotel management agreements or loan agreements.
Ground and Hotel Leases
As of March 31, 2019, the following hotels were subject to leases as follows:
Lease Properties
 
Lease Type
 
Lease Expiration Date
 
Hotel Monaco Washington DC
 
Operating lease
 
November 2059
 
Argonaut Hotel
 
Operating lease
 
December 2059
 
Hotel Zelos San Francisco
 
Operating lease
 
June 2097
 
Hotel Zephyr Fisherman's Wharf
 
Operating lease
 
February 2062
 
Hotel Palomar Los Angeles Beverly Hills
 
Operating lease
 
January 2107
(1) 
Union Station Hotel Nashville, Autograph Collection
 
Operating lease
 
December 2105
 
Southernmost Beach Resort
 
Operating lease
 
April 2029
 
Hyatt Regency Boston Harbor
 
Operating lease
 
April 2077
 
Hilton San Diego Resort & Spa
 
Operating lease
 
July 2068
 
Paradise Point Resort & Spa
 
Operating lease
 
May 2050
 
Hotel Vitale
 
Operating lease
 
March 2056
(2) 
Viceroy Santa Monica Hotel
 
Operating lease
 
September 2065
 
The Westin Copley Place, Boston
 
Operating lease
 
December 2077
(3) 
The Liberty, A Luxury Collection Hotel, Boston
 
Operating lease
 
May 2080
 
Hotel Zeppelin San Francisco
 
Operating and capital lease
 
June 2059
(4) 
Harbor Court Hotel San Francisco
 
Capital lease
 
August 2052
 
The Roger New York
 
Capital lease
 
December 2044
 

(1) The expiration date assumes the exercise of all 19 five-year extension options.
(2) The Company has the option, subject to certain terms and conditions, to extend the ground lease for 14 years to 2070.
(3) No payments are required through maturity.
(4) The Company has the option, subject to certain terms and conditions, to extend the ground lease for 30 years to 2089.

The Company's leases may require minimum fixed rent payments, percentage rent payments based on a percentage of revenues in excess of certain thresholds or rent payments equal to the greater of a minimum fixed rent or percentage rent. Minimum fixed rent may be adjusted annually by increases in consumer price index ("CPI") and may be subject to minimum and maximum increases. Some leases also contain certain restrictions on modifications that can be made to the hotel structures due to their status as national historic landmark.

The Company records expense on a straight-line basis for leases that provide for minimum rental payments that increase in pre-established amounts over the remaining terms of the leases. Ground rent expense was $7.6 million and $3.1 million for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, fixed and variable ground rent expense were $4.3 million and $3.3 million, respectively. Ground rent expense is included in real estate taxes, personal property taxes, property insurance and ground rent in the Company's consolidated statements of operations and comprehensive income.

In January 2019, the Company acquired the ground lease underlying the land of the Solamar Hotel for $6.9 million.

Maturity of lease liabilities for the Company's operating leases is as follows (in thousands):


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Table of Contents

Year ending December 31,
 
 
2019 (excluding the three months ended March 31, 2019)
 
$
12,854

2020
 
17,345

2021
 
17,434

2022
 
17,505

2023
 
17,578

Thereafter