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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
____________________________________________________________________________________
 
ý      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 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                to                               
 
Commission File Number:  001-35074
 
SUMMIT HOTEL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________________________________________________
Maryland
 
27-2962512
(State or other jurisdiction
 
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
 
 
13215 Bee Cave Parkway, Suite B-300
Austin, TX  78738
(Address of principal executive offices, including zip code)
 
(512) 538-2300
(Registrant’s telephone number, including area code)
________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) of this chapter during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
 o
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). o Yes  ý No
 As of April 24, 2019, the number of outstanding shares of common stock of Summit Hotel Properties, Inc. was 105,080,973.
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
i




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Summit Hotel Properties, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
 
 
 
March 31, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Investment in hotel properties, net
 
$
1,952,161

 
$
2,065,554

Undeveloped land
 
2,267

 
2,267

Assets held for sale, net
 
96,523

 
7,633

Investment in real estate loans, net
 
31,284

 
30,700

Right-of-use assets
 
29,722

 

Cash and cash equivalents
 
42,913

 
44,088

Restricted cash
 
28,026

 
28,468

Trade receivables, net
 
23,623

 
13,978

Prepaid expenses and other
 
9,149

 
10,111

Deferred charges, net
 
4,220

 
4,691

Other assets
 
9,754

 
14,807

Total assets
 
$
2,229,642

 
$
2,222,297

LIABILITIES AND EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Debt, net of debt issuance costs
 
$
961,826

 
$
958,712

Lease liabilities
 
19,273

 

Accounts payable
 
4,645

 
5,391

Accrued expenses and other
 
65,929

 
66,050

Total liabilities
 
1,051,673

 
1,030,153

Commitments and contingencies (Note 9)
 


 


Equity:
 
 

 
 

Preferred stock, $0.01 par value per share, 100,000,000 shares authorized:
 
 

 
 

6.45% Series D - 3,000,000 shares issued and outstanding at March 31, 2019 and December 31, 2018 (aggregate liquidation preference of $75,417 at March 31, 2019 and December 31, 2018)
 
30

 
30

6.25% Series E - 6,400,000 shares issued and outstanding at March 31, 2019 and December 31, 2018 (aggregate liquidation preference of $160,861 at March 31, 2019 and December 31, 2018)
 
64

 
64

Common stock, $0.01 par value per share, 500,000,000 shares authorized, 105,080,113 and 104,783,179 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
 
1,051

 
1,048

Additional paid-in capital
 
1,185,790

 
1,185,310

Accumulated other comprehensive loss
 
(6,985
)
 
(1,441
)
(Distributions in excess of retained earnings) retained earnings
 
(4,241
)
 
4,838

Total stockholders’ equity
 
1,175,709

 
1,189,849

Non-controlling interests in operating partnership
 
2,260

 
2,295

Total equity
 
1,177,969

 
1,192,144

Total liabilities and equity
 
$
2,229,642

 
$
2,222,297

 
See Notes to the Condensed Consolidated Financial Statements

1


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
 
 
For the
Three Months Ended
March 31,
 
 
2019
 
2018
Revenues:
 
 

 
 

Room
 
$
128,100

 
$
129,572

Food and beverage
 
6,162

 
6,329

Other
 
4,690

 
4,298

Total revenues
 
138,952

 
140,199

Expenses:
 
 

 
 

Room
 
27,840

 
29,005

Food and beverage
 
4,600

 
4,999

Other hotel operating expenses
 
39,797

 
39,458

Property taxes, insurance and other
 
11,408

 
10,998

Management fees
 
5,146

 
5,352

Depreciation and amortization
 
25,536

 
25,246

Corporate general and administrative
 
5,990

 
6,607

Total expenses
 
120,317

 
121,665

Gain (loss) on disposal of assets, net
 
4,166

 
(43
)
Operating income
 
22,801

 
18,491

Other income (expense):
 
 

 
 

Interest expense
 
(10,852
)
 
(9,329
)
Other income, net
 
1,301

 
789

Total other income (expense)
 
(9,551
)
 
(8,540
)
Income from continuing operations before income taxes
 
13,250

 
9,951

Income tax expense (Note 11)
 
(350
)
 
(260
)
Net income
 
12,900

 
9,691

Non-controlling interest in Operating Partnership
 
(23
)
 
(3
)
Net income attributable to Summit Hotel Properties, Inc.
 
12,877

 
9,688

Preferred dividends
 
(3,709
)
 
(5,543
)
Premium on redemption of preferred stock
 

 
(3,277
)
Net income attributable to common stockholders
 
$
9,168

 
$
868

Earnings per share:
 
 
 
 
Basic and diluted
 
$
0.09

 
$
0.01

Weighted average common shares outstanding:
 
 

 
 

Basic
 
103,749

 
103,500

Diluted
 
103,837

 
103,899

 
See Notes to the Condensed Consolidated Financial Statements

2


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands)
 
 
For the
Three Months Ended
March 31,
 
 
2019
 
2018
Net income
 
$
12,900

 
$
9,691

Other comprehensive income, net of tax:
 
 

 
 

Changes in fair value of derivative financial instruments
 
(5,558
)
 
3,744

Comprehensive income
 
7,342

 
13,435

Comprehensive income attributable to non-controlling interests:
 
 

 
 

Less - Comprehensive income attributable to non-controlling interest in Operating Partnership
 
(9
)
 
(15
)
Comprehensive income attributable to Summit Hotel Properties, Inc.
 
7,333

 
13,420

Preferred dividends
 
(3,709
)
 
(5,543
)
Premium on redemption of preferred stock
 

 
(3,277
)
Comprehensive income attributable to common stockholders
 
$
3,624

 
$
4,600

 
See Notes to the Condensed Consolidated Financial Statements


3


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Changes in Equity
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
(in thousands, except share amounts)
 
 
Shares
 of Preferred
Stock
 
Preferred
Stock
 
Shares
of Common
Stock
 
Common
Stock
 
Additional
Paid-In Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
(Deficit) and
Distributions
 
Total
Stockholders’
Equity
 
Non-controlling Interests in Operating
Partnership
 
Total
Equity
Balance at December 31, 2018
 
9,400,000

 
$
94

 
104,783,179

 
$
1,048

 
$
1,185,310

 
$
(1,441
)
 
$
4,838

 
$
1,189,849

 
$
2,295

 
$
1,192,144

Dividends
 

 

 

 

 

 

 
(21,956
)
 
(21,956
)
 
(47
)
 
(22,003
)
Equity-based compensation
 

 

 
370,826

 
4

 
1,345

 

 

 
1,349

 
3

 
1,352

Shares acquired for employee withholding requirements
 

 

 
(73,892
)
 
(1
)
 
(833
)
 

 

 
(834
)
 

 
(834
)
Other
 

 

 

 

 
(32
)
 

 

 
(32
)
 

 
(32
)
Other comprehensive loss
 

 

 

 

 

 
(5,544
)
 

 
(5,544
)
 
(14
)
 
(5,558
)
Net income
 

 

 

 

 

 

 
12,877

 
12,877

 
23

 
12,900

Balance at March 31, 2019
 
9,400,000

 
$
94

 
105,080,113

 
$
1,051

 
$
1,185,790

 
$
(6,985
)
 
$
(4,241
)
 
$
1,175,709

 
$
2,260

 
$
1,177,969

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
12,800,000

 
$
128

 
104,287,128

 
$
1,043

 
$
1,262,679

 
$
1,451

 
$
9,201

 
$
1,274,502

 
$
2,874

 
$
1,277,376

Redemption of preferred stock
 
(3,400,000
)
 
(34
)
 

 

 
(81,689
)
 

 
(3,277
)
 
(85,000
)
 

 
(85,000
)
Dividends
 

 

 

 

 

 

 
(24,322
)
 
(24,322
)
 
(58
)
 
(24,380
)
Equity-based compensation
 

 

 
584,520

 
6

 
2,214

 

 

 
2,220

 
7

 
2,227

Shares acquired for employee withholding requirements
 

 

 
(187,850
)
 
(2
)
 
(2,722
)
 

 

 
(2,724
)
 

 
(2,724
)
Other
 

 

 

 

 
(61
)
 

 

 
(61
)
 

 
(61
)
Other comprehensive income
 

 

 

 

 

 
3,732

 

 
3,732

 
12

 
3,744

Net income
 

 

 

 

 

 

 
9,688

 
9,688

 
3

 
9,691

Balance at March 31, 2018
 
9,400,000

 
$
94

 
104,683,798

 
$
1,047

 
$
1,180,421

 
$
5,183

 
$
(8,710
)
 
$
1,178,035

 
$
2,838

 
$
1,180,873

 
See Notes to the Condensed Consolidated Financial Statements


4


Summit Hotel Properties, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
 
For the
Three Months Ended
March 31,
 
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
 

Net income
 
$
12,900

 
$
9,691

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

 
 
Depreciation and amortization
 
25,536

 
25,246

Amortization of deferred financing costs
 
381

 
494

Equity-based compensation
 
1,352

 
2,227

(Gain) loss on disposal of assets, net
 
(4,166
)
 
43

Other
 
355

 
(227
)
Changes in operating assets and liabilities:
 
 

 
 

Trade receivables, net
 
(9,645
)
 
(3,953
)
Prepaid expenses and other
 
746

 
499

Accounts payable
 
(510
)
 
(448
)
Accrued expenses and other
 
3,291

 
4,174

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
30,240

 
37,746

INVESTING ACTIVITIES
 
 

 
 

Acquisitions of hotel properties
 
(4,178
)
 

Investment in hotel properties under development
 

 
(4,474
)
Improvements to hotel properties
 
(17,248
)
 
(12,958
)
Proceeds from asset dispositions, net
 
11,310

 

Funding of real estate loans
 
(500
)
 
(5,334
)
Proceeds from collection of real estate loans
 
300

 

NET CASH USED IN INVESTING ACTIVITIES
 
(10,316
)
 
(22,766
)
FINANCING ACTIVITIES
 
 

 
 

Proceeds from issuance of debt
 
45,000

 
270,000

Principal payments on debt
 
(42,326
)
 
(162,034
)
Redemption of preferred stock
 

 
(85,000
)
Dividends paid
 
(22,668
)
 
(24,782
)
Financing fees on debt and other issuance costs
 
(713
)
 
(1,529
)
Repurchase of common shares for withholding requirements
 
(834
)
 
(2,724
)
NET CASH USED IN FINANCING ACTIVITIES
 
(21,541
)
 
(6,069
)
Net change in cash, cash equivalents and restricted cash
 
(1,617
)
 
8,911

CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
 

 
 

Beginning of period
 
72,556

 
66,007

End of period
 
$
70,939

 
$
74,918

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 

 
 

Cash payments for interest
 
$
11,879

 
$
8,422

Accrued acquisition costs and improvements to hotel properties
 
$
5,306

 
$
5,423

Capitalized interest
 
$

 
$
187

Net cash (refunds) payments for income taxes
 
$
(1,049
)
 
$
212

 
See Notes to the Condensed Consolidated Financial Statements

5


SUMMIT HOTEL PROPERTIES, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
NOTE 1 - DESCRIPTION OF BUSINESS
 
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010 as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
 
We focus on owning primarily premium-branded, select-service hotels. At March 31, 2019, our portfolio consisted of 75 hotels with a total of 11,529 guestrooms located in 25 states. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary (“TRS”). We indirectly own 100% of the outstanding equity interests in all of our TRS Lessees.
 
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying Condensed Consolidated Financial Statements of the Company consolidate the accounts of the Company and all entities that are controlled by the Company’s ownership of a majority voting interest in such entities, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.
 
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Act of 1934 (the “Exchange Act”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the three months ended March 31, 2019 may not be indicative of the results that may be expected for the full year of 2019. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
 
Investment in Hotel Properties
 
The Company allocates the purchase price of acquired hotel properties 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. Intangible assets may include certain value associated with the on-going operations of the hotel business being acquired as part of the hotel property acquisition. We determine the acquisition-date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers, including using a discounted cash flow analysis that uses appropriate discount or capitalization rates and available market information.  Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. 

If substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the asset or asset group is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.

Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize hotel development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include hotel development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. We expense the cost of repairs and maintenance as incurred.


6


On a limited basis, we provide financing to developers of hotel properties for development projects. We evaluate these arrangements to determine if we participate in residual profits of the hotel property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the hotel property, we reflect the loan as an investment in hotel properties under development in our Condensed Consolidated Balance Sheets. If classified as hotel properties under development, no interest income is recognized on the loan and interest expense is capitalized as part of our investment in the hotel property during the construction period. 

We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or undeveloped land may be impaired. Additionally, we perform at least annual reviews to monitor the factors that could trigger an impairment.  Factors that we consider for an impairment analysis include, among others: i) significant underperformance relative to historical or anticipated operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, v) changes in values of comparable land or hotel sales, and vi) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If an impairment is identified, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to its estimated fair value.
 
Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changed lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. We adopted ASU No. 2016-02 on January 1, 2019. 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 lease standard in the comparative periods they present in their financial statements in the year of adoption. 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 effect of the adoption of the new standard. In accordance with ASU No. 2016-02, we reclassified certain existing lease-related assets and liabilities to Right-of-use assets as of January 1, 2019. The adoption of ASU No. 2016-02 resulted in the recognition of incremental right-of-use assets and related lease liabilities of $23.6 million on the Condensed Consolidated Balance Sheet as of January 1, 2019.

Notes Receivables

We selectively provide mezzanine lending to developers, where we also have the opportunity to acquire the hotel at or after the completion of the development project, and we also may provide seller financing under limited circumstances. We classify notes receivable as held-to-maturity and carry the notes receivable at cost less the unamortized discount, if any. We routinely evaluate our notes receivable for potential specific credit or collection issues that may indicate an impairment. Losses on notes receivable are recognized when incurred based on our best estimate of probable impairment.

Cash and Cash Equivalents
 
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.
 
Restricted Cash
 
Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
 
Revenue Recognition
 
In accordance with ASU No. 2014-09, revenues from the operation of our hotels are recognized when guestrooms are occupied, services have been rendered or fees have been earned. Revenues are recorded net of any discounts and sales and

7


other taxes collected from customers. Revenues consist of room sales, food and beverage sales, and other hotel revenues and are presented on a disaggregated basis on our Condensed Consolidated Statements of Operations.

Room revenue is generated through short-term contracts with customers whereby customers agree to pay a daily rate for the right to occupy hotel rooms for one or more nights. Our performance obligations are fulfilled at the end of each night that the customers have the right to occupy the rooms. Room revenues are recognized daily at the contracted room rate in effect for each room night.

Food and beverage revenues are generated when customers purchase food and beverage at a hotel's restaurant, bar or other facilities. Our performance obligations are fulfilled at the time that food and beverage is purchased and provided to our customers.

Other revenues such as for parking, meeting space or telephone services are recognized at the point in time or over the time period that the associated good or service is provided. Ancillary services such as parking at certain hotels are provided by third parties and we assess whether we are the principal or agent in such arrangements. If we are determined to be the agent, revenue is recognized based upon the commission paid to us by the third party for the services rendered to our customers. If we are determined to be the principal, revenues are recognized based upon the gross contract price of the service provided. Certain of our hotels have retail spaces, restaurants or other spaces that we lease to third parties. Lease revenues are recognized on a straight­ line basis over the respective lease terms and are included in Other income on our Condensed Consolidated Statement of Operations.

Cash received prior to customer arrival is recorded as an advance deposit from the customer and is recognized as revenue at the time of occupancy.

Equity-Based Compensation
 
Our 2011 Equity Incentive Plan, which was amended and restated effective June 15, 2015 (as amended, the “Equity Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other stock-based awards. We account for the stock options granted upon completion of our IPO at fair value using the Black-Scholes option-pricing model and we account for all other awards of equity, including time-based and performance-based stock awards, using the grant date fair value of those equity awards. Restricted stock awards with performance-based vesting conditions are market-based awards tied to total stockholder return and are valued using a Monte Carlo simulation model in accordance with ASC Topic 718, Compensation — Stock Compensation. We expense the fair value of awards under the Equity Plan ratably over the vesting period and market-based awards are not adjusted for performance. The amount of stock-based compensation expense may be subject to adjustment in future periods due to a change in forfeiture assumptions or modification of previously granted awards.
 
Derivative Financial Instruments and Hedging
 
We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include swaps, caps and floors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction. All derivative financial instruments are recorded at fair value as a net asset or liability in our Condensed Consolidated Balance Sheets.
 
The change in the fair value of the hedging instruments is recorded in Other comprehensive income. Amounts deferred in Other comprehensive income will be reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings.

Income Taxes

We have elected to be taxed as a REIT under certain provisions of the Internal Revenue Code. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRS at regular corporate income tax rates) to the extent we distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-

8


elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions.

Fair Value Measurement
 
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
 
Level 1:
 
Observable inputs such as quoted prices in active markets.
Level 2:
 
Directly or indirectly observable inputs, other than quoted prices in active markets.
Level 3:
 
Unobservable inputs in which there is little or no market information, which require a reporting entity to develop its own assumptions.

 
Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
 
Market approach:
 
Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Cost approach:
 
Amount required to replace the service capacity of an asset (replacement cost).
Income approach:
 
Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).


Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
 
We have elected a measurement alternative for equity investments, such as our purchase options, that do not have readily determinable fair values. Under the alternative, our purchase options are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer, if any.

Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Standards

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which clarifies when an entity recognizes a credit loss on certain financial assets. ASU 2016-13 is effective for our fiscal year commencing on January 1, 2020, with early adoption permitted. The adoption of ASU No. 2016-13 will not have a material effect on our consolidated financial position or results of operations.

In August 2018, the FASB issued ASU No. 2018-15, Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement, which clarifies how an entity should account for fees paid in a cloud computing arrangement. ASU 2018-15 is effective for our fiscal year commencing on January 1, 2020, with early adoption permitted. The adoption of ASU No. 2018-15 will not have a material effect on our consolidated financial position or results of operations.


9


NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET
 
Investment in Hotel Properties, net

Investment in hotel properties, net at March 31, 2019 and December 31, 2018 is as follows (in thousands):
 
 
 
March 31, 2019
 
December 31, 2018
Hotel buildings and improvements
 
$
1,814,628

 
$
1,916,194

Land
 
277,452

 
288,833

Furniture, fixtures and equipment
 
166,688

 
165,026

Construction in progress
 
22,442

 
21,059

Intangible assets
 
11,514

 
22,064

 
 
2,292,724

 
2,413,176

Less - accumulated depreciation and amortization
 
(340,563
)
 
(347,622
)
 
 
$
1,952,161

 
$
2,065,554



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changed lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. In accordance with ASU No. 2016-02, we reclassified certain existing lease-related intangible assets to Right-of-use assets as of January 1, 2019 (See "Note 5 - Leases" for further information).

Asset Sales

On February 12, 2019, we completed the sale of two hotel properties, the Country Inn & Suites - Charleston, WV and the Holiday Inn Express - Charleston, WV, for an aggregate sales price of $11.6 million. The sale of these properties resulted in the realization of an aggregate gain of $4.2 million.

Hotel Property Acquisitions

We did not acquire any hotel properties during the three months ended March 31, 2019 and 2018.

On January 31, 2019, we exercised our option pursuant to a ground lease agreement to purchase the land under our Residence Inn by Marriott in Baltimore (Hunt Valley), MD for $4.2 million, which resulted in a termination of obligations under the ground lease. As a result, this hotel property is no longer subject to a ground lease. 


10


The results of operations of acquired hotel properties are included in the Condensed Consolidated Statements of Operations beginning on their respective acquisition dates. The following unaudited pro forma information includes operating results for 75 hotels owned as of March 31, 2019 as if all such hotels had been owned by us since January 1, 2018.  For hotels acquired by us after January 1, 2018 (the "Acquired Hotels"), we have included in the pro forma information the financial results of each of the Acquired Hotels for the period prior to acquisition by us (the "Preacquisition Period"). The financial results for the Pre-Acquisition Period were provided by the third-party owner of such Acquired Hotel prior to purchase by us and such information has not been audited or reviewed by our auditors or adjusted by us. For hotels sold by us between January 1, 2018 and March 31, 2019 (the "Disposed Hotels"), the unaudited pro forma information excludes the financial results, including gains on disposal of assets, of each of the Disposed Hotels for the period of ownership by us from January 1, 2018 through the date that the Disposed Hotels were sold by us. The unaudited pro forma information is included to enable comparison of results for the current reporting period to results for the comparable period of the prior year and is not indicative of what actual results of operations would have been had the hotel acquisitions and dispositions taken place on or before January 1, 2018. The pro forma amounts exclude the gain or loss on the sale of hotel properties during the three months ended March 31, 2019 and 2018. This information does not purport to be indicative of or represent results of operations for future periods.

The unaudited condensed pro forma financial information for the 75 hotel properties owned at March 31, 2019 for the three months ended March 31, 2019 and 2018 is as follows (in thousands, except per share):
 
 
 
For the
Three Months Ended
March 31,
 
 
2019
 
2018
Revenues
 
$
138,682

 
$
132,580

Income from hotel operations
 
$
50,248

 
$
47,633

Net income (1)
 
$
8,887

 
$
8,344

Net income (loss) attributable to common stockholders, net of amount allocated to participating securities (1) (2)
 
$
5,098

 
$
(545
)
Basic and diluted net income (loss) per share attributable to common stockholders (1) (2)
 
$
0.05

 
$
(0.01
)

(1)
Pro forma amounts include depreciation expense, property tax expense, interest expense, income tax expense, and other corporate expenses totaling $51.2 million and $48.2 million for the three months ended March 31, 2019 and 2018, respectively.
(2)
Pro forma amounts for the three months ended March 31, 2018 include the effect of the premium on redemption of preferred stock of $3.3 million.

Assets Held for Sale

Assets held for sale at March 31, 2019 included a land parcel in Flagstaff, AZ and a portfolio of six properties that were sold on April 17, 2019. Assets held for sale at December 31, 2018 included a land parcel in Flagstaff, AZ and a portfolio of two properties that were sold on February 12, 2019. Assets held for sale were as follows (in thousands):

 
 
March 31, 2019
 
December 31, 2018
Hotel buildings and improvements
 
$
103,891

 
$
7,929

Land
 
12,950

 
2,442

Furniture, fixtures and equipment
 
11,086

 
2,519

Franchise fees
 
573

 
131

Other
 
83

 

 
 
128,583

 
13,021

Less - accumulated depreciation and amortization
 
(32,060
)
 
(5,388
)
 
 
$
96,523

 
$
7,633


   


11


NOTE 4 - DEBT
 
At March 31, 2019 and December 31, 2018, our indebtedness was comprised of borrowings under our $600.0 million senior unsecured revolving credit and term loan facility (described below), the 2018 Term Loan (as defined below), the 2017 Term Loan (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivatives, for all borrowings was 4.26% at March 31, 2019 and 4.27% at December 31, 2018.

Debt, net of debt issuance costs, is as follows (in thousands):

 
 
March 31, 2019
 
December 31, 2018
Revolving debt
 
$
125,000

 
$
115,000

Term loans
 
650,000

 
650,000

Mortgage loans
 
192,686

 
200,011

 
 
967,686

 
965,011

Unamortized debt issuance costs
 
(5,860
)
 
(6,299
)
Debt, net of debt issuance costs
 
$
961,826

 
$
958,712



We have entered into interest rate swaps to partially fix the interest rates on a portion of our variable interest rate indebtedness. See "Note 6 - Derivative Financial Instruments and Hedging" to the Condensed Consolidated Financial Statements for additional information. Our total fixed-rate and variable-rate debt, after considering our interest rate derivative agreements that are currently effective, is as follows (in thousands):
 
 
 
March 31, 2019
 
Percentage
 
December 31, 2018
 
Percentage
Fixed-rate debt
 
$
562,000

 
58%
 
$
569,103

 
59%
Variable-rate debt
 
405,686

 
42%
 
395,908

 
41%
 
 
$
967,686

 
 
 
$
965,011

 
 


Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
 
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
 
Valuation Technique
Fixed-rate debt
 
$
162,000

 
$
160,638

 
$
169,103

 
$
166,256

 
Level 2 - Market approach

 
At March 31, 2019 and December 31, 2018, we had $400.0 million of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value.  Differences between carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional information on our use of derivatives as interest rate hedges, refer to "Note 6 - Derivative Financial Instruments and Hedging."

$600 Million Senior Unsecured Credit and Term Loan Facility 

On December 6, 2018, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a $600.0 million senior unsecured facility (the “2018 Unsecured Credit Facility”). The 2018 Unsecured Credit Facility is comprised of a $400.0 million revolving credit facility (the “$400 Million Revolver”) and a $200.0 million term loan (the “$200 Million Term Loan”). At March 31, 2019, the maximum amount of borrowing provided by the 2018 Unsecured Credit Facility was $600.0 million, of which we had $325.0 million borrowed and $275.0 million available to borrow. 

The 2018 Unsecured Credit Facility has an accordion feature which will allow the Company to increase the total commitments by an aggregate of up to $300.0 million.  The $400 Million Revolver will mature on March 31, 2023 and can be extended to March 31, 2024 at the Company’s option, subject to certain conditions. The $200 Million Term Loan will mature on April 1, 2024.  

12



The interest rate on the 2018 Unsecured Credit Facility is based on a pricing grid ranging from 140 basis points to 215 basis points plus LIBOR for the $400 Million Revolver and 135 basis points to 210 basis points plus LIBOR for the $200 Million Term Loan, depending upon the Company's leverage ratio. The interest rate at March 31, 2019 for the $200 Million Term Loan was 4.09%

Financial and Other Covenants.  We are required to comply with various financial and other covenants to draw and maintain borrowings under the 2018 Unsecured Credit Facility. At March 31, 2019, we were in compliance with all financial covenants.

Unencumbered Assets. The 2018 Unsecured Credit Facility is unsecured.  However, borrowings under the 2018 Unsecured Credit Facility are limited by the value of hotel assets that qualify as unencumbered assets. At March 31, 2019, the Company had 53 unencumbered hotel properties (the "Unencumbered Properties") supporting the 2018 Unsecured Credit Facility. 

Former $450 Million Senior Unsecured Credit and Term Loan Facility
 
On January 15, 2016, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a $450.0 million senior unsecured credit facility (the "2016 Unsecured Credit Facility"). The 2016 Unsecured Credit Facility was comprised of a $300.0 million revolving credit facility (the “$300 Million Revolver”) and a $150.0 million term loan (the “$150 Million Term Loan”). The 2016 Unsecured Credit Facility was replaced by the 2018 Unsecured Credit Facility. The outstanding principal balance on the 2016 Unsecured Credit Facility was transferred to the 2018 Unsecured Credit Facility and the 2016 Unsecured Credit Facility was paid off in full and terminated.

Unsecured Term Loans

2018 Term Loan
 
On February 15, 2018, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a new $225.0 million unsecured term loan (the “2018 Term Loan”) with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation. The 2018 Term Loan has an accordion feature that allows us to increase the total commitments by $150.0 million prior to the maturity date of February 14, 2025, subject to certain conditions.  At closing, we drew $140.0 million of the $225.0 million available under the 2018 Term Loan and used the proceeds to pay off and replace the 2015 Term Loan. On May 16, 2018, we drew the remaining $85.0 million available under the 2018 Term Loan and used the proceeds to pay down the $300 Million Revolver.

We pay interest on advances at varying rates, based upon, at our option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a LIBOR margin between 1.80% and 2.55%, depending upon our leverage ratio (as defined in the loan documents), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, and 1-month LIBOR plus 1.00%, plus a base rate margin between 0.80% and 1.55%, depending upon our leverage ratio.  We are required to pay other fees, including customary arrangement and administrative fees. The interest rate at March 31, 2019 was 4.39%.

Financial and Other Covenants.  We are required to comply with a series of financial and other covenants to draw and maintain borrowings under the 2018 Term Loan. At March 31, 2019, we were in compliance with all financial covenants.

Unencumbered Assets.  The 2018 Term Loan is unsecured.  However, borrowings under the term loan are limited by the value of the assets that qualify as unencumbered assets.  At March 31, 2019, the Unencumbered Properties also supported the 2018 Term Loan.

2017 Term Loan

On September 26, 2017, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a $225.0 million unsecured term loan (the "2017 Term Loan") with KeyBank National Association, as administrative agent, and a syndicate of lenders listed in the loan documentation.

The 2017 Term Loan has an accordion feature which allows us to increase the total commitments by an aggregate of $175.0 million prior to the maturity date, subject to certain conditions. The 2017 Term Loan matures on November 25, 2022.


13


We pay interest on advances at varying rates, based upon, at our option, either (i) 1-, 2-, 3-, or 6-month LIBOR, plus a LIBOR margin between 1.45% and 2.20%, depending upon our leverage ratio (as defined in the loan documents), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus 0.50%, and 1-month LIBOR plus 1.00%, plus a base rate margin between 0.45% and 1.20%, depending upon our leverage ratio. We are required to pay other fees, including customary arrangement and administrative fees.

Financial and Other Covenants.  We are required to comply with a series of financial and other covenants to draw and maintain borrowings under the 2017 Term Loan. At March 31, 2019, we were in compliance with all financial covenants.

Unencumbered Assets.  The 2017 Term Loan is unsecured.  However, borrowings under the term loan are limited by the value of the assets that qualify as unencumbered assets.  At March 31, 2019, the Unencumbered Properties also supported the 2017 Term Loan.

At closing, we drew $125.0 million of the $225.0 million available under the 2017 Term Loan and used the proceeds to pay down the principal balance of our $300 Million Revolver. On December 11, 2017, we drew the remaining $100.0 million of the $225.0 million available under the 2017 Term Loan and used the proceeds to pay down the principal balance of our $300 Million Revolver. The interest rate at March 31, 2019 was 4.09%.

2015 Term Loan

On April 7, 2015, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into an unsecured term loan (the “2015 Term Loan”), with an original principal amount of $125.0 million, that was later increased to $140.0 million, upon exercise of an accordion feature.

On February 15, 2018, we terminated the facility and repaid the $140.0 million outstanding balance with funds received from the 2018 Term Loan.

Metabank Loan

On June 30, 2017, we entered into a $47.6 million secured, non-recourse loan with MetaBank (the "MetaBank Loan"). During the year ended December 31, 2017, we drew $47.6 million on the MetaBank Loan and used the proceeds to pay down the principal balance of our $300 Million Revolver. The MetaBank Loan provides for a fixed interest rate of 4.44% and originally provided for interest-only payments for 18 months following the closing date. On January 31, 2019, we entered into a modification agreement, at no additional cost, that increased the interest-only period from 18 months to 24 months following the closing date. After this 24 month period, the loan is amortized over 25 years through the maturity date of July 1, 2027. The MetaBank Loan is secured by three hotels and is subject to a prepayment penalty if prepaid prior to April 1, 2027.

Mortgage Loans

At March 31, 2019, we had mortgage loans totaling $192.7 million that are secured primarily by first mortgage liens on certain hotel properties. On March 19, 2019, we had a mortgage loan of $26.2 million that was secured by four hotel properties. We defeased $6.3 million of the principal to have the encumbrance released on one property, the Hyatt Place in Arlington, TX, to facilitate the sale of the property. As a result of this transaction, we recorded debt transaction costs of $0.6 million primarily related to the debt defeasance premium.


14



NOTE 5 - LEASES

The Company has operating leases related to the land under certain hotel properties, conference centers, parking spaces, automobiles, our corporate office and other miscellaneous office equipment. These leases have remaining terms of 1 year to 80 years, some of which include options to extend the leases for additional years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Certain of our lease agreements include rental payments based on a percentage of revenue over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We rent or sublease certain real estate to third parties.

On January 1, 2019, the Company adopted ASC No. 842, Leases, and recognized right-of-use lease assets and related liabilities.  The right-of-use assets and related liabilities include renewal options reasonably certain to be exercised.  Since most of the Company's leases do not provide an implicit rate, we used our incremental borrowing rate of 5.0% calculated based on information available at adoption.

During the three months ended March 31, 2019, the Company's total operating lease cost was $1.0 million and the operating cash outflows from operating leases was $0.9 million. As of March 31, 2019, the weighted average operating lease term was 29.4 years.

On January 31, 2019, we exercised our option pursuant to a ground lease agreement to purchase the land under our hotel property in Baltimore (Hunt Valley), MD for $4.2 million, which resulted in a termination of obligations under the ground lease.

Operating lease maturities as of March 31, 2019 are as follows (in thousands):

2019
$
1,651

2020
2,051

2021
1,934

2022
1,715

2023
863

Thereafter
28,442

Total lease payments (1)
36,656

Less interest
(17,383
)
Total
$
19,273


(1)
Certain payments above include future increases to the minimum fixed rent based on the Consumer Price Index in effect at the initial measurement of the lease balances.


15


NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
 
Information about our derivative financial instruments at March 31, 2019 and December 31, 2018 is as follows (dollars in thousands): 
 
 
 
 
 
 
Notional Amount
 
Fair Value
Contract date
 
Effective Date
 
Expiration Date
 
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
October 2, 2017
 
January 29, 2018
 
January 31, 2023
 
$
100,000

(1) 
$
100,000

 
$
630

 
$
1,758

October 2, 2017
 
January 29, 2018
 
January 31, 2023
 
100,000

(1) 
100,000

 
585

 
1,703

June 11, 2018
 
September 28, 2018
 
September 30, 2024
 
75,000

(2) 
75,000

 
(2,731
)
 
(1,656
)
June 11, 2018
 
December 31, 2018
 
December 31, 2025
 
125,000

(3) 
125,000

 
(5,623
)
 
(3,386
)
 
 
 
 
 
 
$
400,000

 
$
400,000

 
$
(7,139
)
 
$
(1,581
)

 
(1)
Interest rate swap partially fixes the interest rate on a portion of our variable interest rate unsecured indebtedness and converts LIBOR from a floating rate to an average annual fixed rate of 1.98%.
(2)
Interest rate swap partially fixes the interest rate on a portion of our variable interest rate unsecured indebtedness and converts LIBOR from a floating rate to an average annual fixed rate of 2.87%.
(3)
Interest rate swap partially fixes the interest rate on a portion of our variable interest rate unsecured indebtedness and converts LIBOR from a floating rate to an average annual fixed rate of 2.93%.

Our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At March 31, 2019 and December 31, 2018, two of our interest rate swaps were in an asset position and two were in a liability position. We are not required to post any collateral related to these agreements and are not in breach of any financial provisions of the agreements.

Changes in the fair value of the hedging instruments are deferred in Other comprehensive income and are reclassified to Interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings. In the next twelve months, we estimate that $0.2 million will be reclassified from Other comprehensive income and recorded as an increase to Interest expense.
 
The table below details the location in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands):
 
 
 
For the
Three Months Ended
March 31,
 
 
2019
 
2018
(Loss) gain recognized in Other comprehensive income on derivative financial instruments
 
$
(5,497
)
 
$
3,537

Gain (loss) reclassified from Other comprehensive income to Interest expense
 
$
61

 
$
(207
)
Total interest expense in which the effects of cash flow hedges are recorded
 
$
(10,852
)
 
$
(9,329
)

 
NOTE 7 - EQUITY
 
Common Stock
 
The Company is authorized to issue up to 500,000,000 shares of common stock, $0.01 par value per share.  Each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.


16


Changes in common stock during the three months ended March 31, 2019 and 2018 were as follows:

 
For the
Three Months Ended
March 31,
 
2019
 
2018
Beginning common shares outstanding
104,783,179

 
104,287,128

Grants under the Equity Plan
537,304

 
583,373

Common stock issued for director fees

 
1,147

Performance share and other forfeitures
(166,478
)
 

Shares retained for employee tax withholding requirements
(73,892
)
 
(187,850
)
Ending common shares outstanding
105,080,113

 
104,683,798



Preferred Stock
 
The Company is authorized to issue up to 100,000,000 shares of preferred stock, $0.01 par value per share, of which 90,600,000 is currently undesignated, 3,000,000 shares have been designated as 6.45% Series D Cumulative Redeemable Preferred Stock (the "Series D preferred shares") and 6,400,000 shares have been designated as 6.25% Series E Cumulative Redeemable Preferred Stock (the "Series E preferred shares").

On March 20, 2018, the Company paid $85.3 million to redeem all 3,400,000 of its outstanding 7.125% Series C Cumulative Redeemable Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends.

The Company's outstanding shares of preferred stock (collectively, “Preferred Shares”) rank senior to our common stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series D or Series E preferred shares prior to June 28, 2021 and November 13, 2022, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of $25 per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in 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 a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series D preferred share is 3.9216 shares of common stock and each Series E preferred share is 3.1686 shares of common stock, all subject to certain adjustments.
 
The Company pays dividends at an annual rate of $1.6125 for each Series D preferred share and $1.5625 for each Series E preferred share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
 
Non-controlling Interests in Operating Partnership
 
Pursuant to the limited partnership agreement of our Operating Partnership, the unaffiliated third parties who hold common units of limited partnership interest ("Common Units") in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of common stock at the time of redemption; however, the Company has the option to redeem Common Units with shares of our common stock on a one-for-one basis. The number of shares of our common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations.

 At March 31, 2019 and December 31, 2018, unaffiliated third parties owned 259,265 Common Units of the Operating Partnership, representing less than a 1% limited partnership interest in the Operating Partnership for each period.
 
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income allocated to these Common Units is reported on the Company’s Condensed Consolidated Statement of Operations as net income attributable to non-controlling interests of the Operating Partnership.

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NOTE 8 - FAIR VALUE MEASUREMENT
 
The following table presents information about our financial instruments measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
 
 
 
Fair Value Measurements at March 31, 2019 using
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
1,215

 
$

 
$
1,215

Purchase options related to real estate loans
 

 

 
6,120

 
6,120

Liabilities: