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Section 1: 10-Q (10-Q)

Document


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 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: 000-54263
400911546_cwihighreslogo23.jpg
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
 
 
 
Smaller reporting company o
Emerging growth company o
 

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

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

Registrant has 142,681,934 shares of common stock, $0.001 par value, outstanding at November 1, 2019.
 




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

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements about the impact of hurricanes and other natural disasters on certain hotels, including the condition of the properties and cost estimates. In addition, on October 22, 2019, we announced that we have entered into a merger agreement with Carey Watermark Investors 2 Incorporated and an internalization agreement with our external advisor and subadvisor. These transactions are expected to close in the first quarter of 2020, although there can be no assurance that they will close in our expected timeframe or at all. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission (“SEC”), including but not limited to those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 15, 2019 (the “2018 Annual Report”), and those that will be included in the joint proxy statement/prospectus that we expect to file with the SEC with regard to the proposed merger. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

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


CWI 9/30/2019 10-Q 1



PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Investments in real estate:
 
 
 
Hotels, at cost
$
2,085,575

 
$
2,175,975

Accumulated depreciation
(295,974
)
 
(266,323
)
Net investments in hotels
1,789,601

 
1,909,652

Assets held for sale (Note 4)
15,203

 

Equity investments in real estate
106,890

 
112,715

Operating lease right-of-use assets
47,461

 

Cash and cash equivalents
78,831

 
66,593

Intangible assets, net
65,184

 
76,671

Restricted cash
61,443

 
54,537

Accounts receivable, net
22,091

 
36,884

Other assets
24,761

 
23,092

Total assets (a)
$
2,211,465

 
$
2,280,144

Liabilities and Equity
 
 
 
Non-recourse debt, net, including debt attributable to Assets held for sale
$
1,274,847

 
$
1,326,014

WPC Credit Facility
35,000

 
41,637

Accounts payable, accrued expenses and other liabilities
107,047

 
128,955

Operating lease liabilities
71,540

 

Due to related parties and affiliates
3,040

 
6,258

Other liabilities held for sale (Note 4)
208

 

Distributions payable
20,171

 
19,898

Total liabilities (a)
1,511,853

 
1,522,762

Commitments and contingencies (Note 10)

 


Common stock, $0.001 par value; 300,000,000 shares authorized; 141,548,634 and 139,627,375 shares, respectively, issued and outstanding
142

 
140

Additional paid-in capital
1,195,949

 
1,174,887

Distributions and accumulated losses
(548,011
)
 
(471,130
)
Accumulated other comprehensive loss
(266
)
 
(286
)
Total stockholders’ equity
647,814

 
703,611

Noncontrolling interests
51,798

 
53,771

Total equity
699,612

 
757,382

Total liabilities and equity
$
2,211,465

 
$
2,280,144

__________
(a)
See Note 2 for details related to variable interest entities (“VIEs”).

See Notes to Consolidated Financial Statements.

CWI 9/30/2019 10-Q 2



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
Rooms
$
95,825

 
$
94,465

 
$
298,126

 
$
287,031

Food and beverage
38,481

 
34,943

 
127,126

 
118,564

Other operating revenue
13,997

 
12,752

 
40,483

 
34,057

Business interruption income
2,815

 
6,075

 
3,627

 
18,273

Total Hotel Revenues
151,118

 
148,235

 
469,362

 
457,925

Expenses
 
 
 
 
 
 
 
Rooms
21,616

 
22,161

 
66,227

 
66,204

Food and beverage
27,696

 
27,056

 
86,866

 
84,083

Other hotel operating expenses
7,213

 
6,922

 
21,366

 
19,704

Property taxes, insurance, rent and other
17,052

 
14,640

 
55,539

 
45,906

Sales and marketing
14,492

 
14,066

 
43,672

 
43,381

General and administrative
13,859

 
13,247

 
41,624

 
39,739

Repairs and maintenance
4,920

 
4,956

 
15,013

 
14,866

Utilities
4,124

 
4,025

 
11,510

 
10,991

Management fees
3,484

 
4,502

 
12,971

 
13,963

Depreciation and amortization
19,102

 
18,642

 
57,845

 
57,615

Total Hotel Operating Expenses
133,558

 
130,217

 
412,633

 
396,452

Asset management fees to affiliate and other expenses
3,464

 
3,770

 
11,073

 
11,524

Corporate general and administrative expenses
3,052

 
2,839

 
9,211

 
8,555

Gain on hurricane-related property damage
(880
)
 
(41
)
 
(880
)
 
(1,106
)
Transaction costs
728

 

 
1,483

 

Total Expenses
139,922

 
136,785

 
433,520

 
415,425

Operating income before net gain (loss) on sale of real estate
11,196

 
11,450

 
35,842

 
42,500

Net gain (loss) on sale of real estate
5,881

 
(669
)
 
5,881

 
31,260

Operating Income
17,077

 
10,781

 
41,723

 
73,760

Interest expense
(17,219
)
 
(16,557
)
 
(50,205
)
 
(49,826
)
Equity in (losses) earnings of equity method investments in real estate, net
(759
)
 
(589
)
 
101

 
(538
)
Net loss on extinguishment of debt

 
(322
)
 
(136
)
 
(511
)
Other income
355

 
140

 
605

 
508

(Loss) income before income taxes
(546
)
 
(6,547
)
 
(7,912
)
 
23,393

Provision for income taxes
(1,030
)
 
(986
)
 
(2,133
)
 
(3,516
)
Net (Loss) Income
(1,576
)
 
(7,533
)
 
(10,045
)
 
19,877

(Income) loss attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,537, $2,478, $4,905 and $3,450, respectively)
(878
)
 
323

 
(6,474
)
 
(5,180
)
Net (Loss) Income Attributable to CWI Stockholders
$
(2,454
)
 
$
(7,210
)
 
$
(16,519
)
 
$
14,697

Basic and Diluted (Loss) Income Per Share
$
(0.02
)
 
$
(0.05
)
 
$
(0.12
)
 
$
0.11

Basic and Diluted Weighted-Average Shares Outstanding
141,952,133

 
139,439,615

 
141,332,118

 
139,175,017

 
See Notes to Consolidated Financial Statements.

CWI 9/30/2019 10-Q 3



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net (Loss) Income
$
(1,576
)
 
$
(7,533
)
 
$
(10,045
)
 
$
19,877

Other Comprehensive Income
 
 
 
 
 
 
 
Unrealized gain on derivative instruments
160

 
85

 
28

 
511

Comprehensive (Loss) Income
(1,416
)
 
(7,448
)
 
(10,017
)
 
20,388

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net (income) loss
(878
)
 
323

 
(6,474
)
 
(5,180
)
Unrealized (gain) loss on derivative instruments
(6
)
 
(1
)
 
(8
)
 
3

Comprehensive (income) loss attributable to noncontrolling interests
(884
)
 
322

 
(6,482
)
 
(5,177
)
Comprehensive (Loss) Income Attributable to CWI Stockholders
$
(2,300
)
 
$
(7,126
)
 
$
(16,499
)
 
$
15,211


See Notes to Consolidated Financial Statements.

CWI 9/30/2019 10-Q 4



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(in thousands, except share and per share amounts)

 
CWI Stockholders
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Distributions
and Accumulated
Losses
 
Accumulated
Other
Comprehensive (Loss) Income
 
Total CWI
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
Balance at July 1, 2019
141,040,038

 
$
141

 
$
1,190,111

 
$
(525,386
)
 
$
(420
)
 
$
664,446

 
$
54,688

 
$
719,134

Net (loss) income
 
 
 
 
 
 
(2,454
)
 
 
 
(2,454
)
 
878

 
(1,576
)
Shares issued, net of offering costs
1,028,483

 
1

 
10,684

 
 
 
 
 
10,685

 
 
 
10,685

Shares issued to affiliates
342,920

 

 
3,562

 
 
 
 
 
3,562

 
 
 
3,562

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(3,774
)
 
(3,774
)
Shares issued under share incentive plans
 
 
 
 
134

 
 
 
 
 
134

 
 
 
134

Distributions declared ($0.1425 per share)
 
 
 
 
 
 
(20,171
)
 
 
 
(20,171
)
 
 
 
(20,171
)
Other comprehensive income
 
 
 
 
 
 
 
 
154

 
154

 
6

 
160

Repurchase of shares
(862,807
)
 

 
(8,542
)
 
 
 
 
 
(8,542
)
 
 
 
(8,542
)
Balance at September 30, 2019
141,548,634

 
$
142

 
$
1,195,949

 
$
(548,011
)
 
$
(266
)
 
$
647,814

 
$
51,798

 
$
699,612

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2018
138,539,759

 
$
139

 
$
1,162,515

 
$
(417,555
)
 
$
(26
)
 
$
745,073

 
$
57,689

 
$
802,762

Net loss
 
 
 
 
 
 
(7,210
)
 
 
 
(7,210
)
 
(323
)
 
(7,533
)
Shares issued, net of offering costs
1,048,320

 
1

 
10,916

 
 
 
 
 
10,917

 
 
 
10,917

Shares issued to affiliates
339,550

 

 
3,534

 
 
 
 
 
3,534

 
 
 
3,534

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(2,540
)
 
(2,540
)
Shares issued under share incentive plans
 
 
 
 
101

 
 
 
 
 
101

 
 
 
101

Distributions declared ($0.1425 per share)
 
 
 
 
 
 
(19,827
)
 
 
 
(19,827
)
 
 
 
(19,827
)
Other comprehensive income
 
 
 
 
 
 
 
 
85

 
85

 
1

 
86

Repurchase of shares
(787,680
)
 
(1
)
 
(7,808
)
 
 
 
 
 
(7,809
)
 
 
 
(7,809
)
Balance at September 30, 2018
139,139,949

 
$
139

 
$
1,169,258

 
$
(444,592
)
 
$
59

 
$
724,864

 
$
54,827

 
$
779,691




CWI 9/30/2019 10-Q 5



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
(in thousands, except share and per share amounts)
 
CWI Stockholders
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Distributions
and Accumulated
Losses
 
Accumulated
Other
Comprehensive (Loss) Income
 
Total CWI
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
Balance at January 1, 2019
139,627,375

 
$
140

 
$
1,174,887

 
$
(471,130
)
 
$
(286
)
 
$
703,611

 
$
53,771

 
$
757,382

Net (loss) income
 
 
 
 
 
 
(16,519
)
 
 
 
(16,519
)
 
6,474

 
(10,045
)
Shares issued, net of offering costs
3,109,275

 
3

 
32,299

 
 
 
 
 
32,302

 
 
 
32,302

Shares issued to affiliates
1,026,336

 
1

 
10,669

 
 
 
 
 
10,670

 
 
 
10,670

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
175

 
175

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(8,630
)
 
(8,630
)
Shares issued under share incentive plans
24,975

 

 
226

 
 
 
 
 
226

 
 
 
226

Stock-based compensation to directors
20,206

 

 
210

 
 
 
 
 
210

 
 
 
210

Distributions declared ($0.4275 per share)
 
 
 
 
 
 
(60,362
)
 
 
 
(60,362
)
 
 
 
(60,362
)
Other comprehensive income
 
 
 
 
 
 
 
 
20

 
20

 
8

 
28

Repurchase of shares
(2,259,533
)
 
(2
)
 
(22,342
)
 
 
 
 
 
(22,344
)
 
 
 
(22,344
)
Balance at September 30, 2019
141,548,634

 
$
142

 
$
1,195,949

 
$
(548,011
)
 
$
(266
)
 
$
647,814

 
$
51,798

 
$
699,612

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
137,826,503

 
$
138

 
$
1,153,652

 
$
(399,884
)
 
$
(455
)
 
$
753,451

 
$
54,437

 
$
807,888

Net income
 
 
 
 
 
 
14,697

 
 
 
14,697

 
5,180

 
19,877

Shares issued, net of offering costs
3,135,146

 
3

 
33,000

 
 
 
 
 
33,003

 
 
 
33,003

Shares issued to affiliates
1,016,974

 
1

 
10,717

 
 
 
 
 
10,718

 
 
 
10,718

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(4,787
)
 
(4,787
)
Shares issued under share incentive plans
18,971

 

 
175

 
 
 
 
 
175

 
 
 
175

Stock-based compensation to directors
17,291

 

 
180

 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.4275 per share)
 
 
 
 
 
 
(59,405
)
 
 
 
(59,405
)
 
 
 
(59,405
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
514

 
514

 
(3
)
 
511

Repurchase of shares
(2,874,936
)
 
(3
)
 
(28,466
)
 
 
 
 
 
(28,469
)
 
 
 
(28,469
)
Balance at September 30, 2018
139,139,949

 
$
139

 
$
1,169,258

 
$
(444,592
)
 
$
59

 
$
724,864

 
$
54,827

 
$
779,691


See Notes to Consolidated Financial Statements.

CWI 9/30/2019 10-Q 6



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

Nine Months Ended September 30,
 
2019
 
2018
Cash Flows — Operating Activities
 
 
 
Net (loss) income
$
(10,045
)
 
$
19,877

Adjustments to net (loss) income:
 
 
 
Depreciation and amortization
57,845

 
57,615

Asset management fees to affiliates settled in shares
10,673

 
10,628

Net gain on sale of real estate (Note 4)
(5,881
)
 
(31,260
)
Business interruption income
(3,627
)
 
(18,273
)
Amortization of deferred financing costs and other
2,507

 
2,296

Gain on hurricane-related property damage
(880
)
 
(1,106
)
Amortization of stock-based compensation expense
560

 
455

Net loss on extinguishment of debt
136

 
511

Equity in (earnings) losses of equity method investments in real estate, net
(101
)
 
538

Straight-line rent adjustments

 
4,316

Net changes in other operating assets and liabilities
12,341

 
6,396

Net decrease in operating lease right-of-use assets
4,978

 

Business interruption insurance proceeds
3,627

 
9,323

(Decrease) increase in due to related parties and affiliates
(3,393
)
 
1,087

Distributions of earnings from equity method investments
2,888

 
2,802

Insurance proceeds for remediation work due to hurricane damage
2,773

 
4,031

Net increase in operating lease liabilities
1,142

 

Receipt of key money and other deferred incentive payments
500

 
58

Funding of hurricane/fire-related remediation work
(3
)
 
(10,738
)
Net Cash Provided by Operating Activities
76,040

 
58,556

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Proceeds from the sale of real estate investments (Note 4)
77,447

 
156,756

Capital expenditures
(29,991
)
 
(60,311
)
Hurricane-related property insurance proceeds
11,661

 
14,379

Distributions from equity investments in excess of cumulative equity income
6,421

 
12,893

Capital contributions to equity investments in real estate
(3,429
)
 
(732
)
Repayments of loan receivable
167

 
238

Net Cash Provided by Investing Activities
62,276

 
123,223

 
 
 
 
Cash Flows — Financing Activities
 
 
 
Scheduled payments and prepayments of mortgage principal
(136,563
)
 
(166,332
)
Proceeds from mortgage financing
85,430

 
75,250

Distributions paid
(60,089
)
 
(59,219
)
Net proceeds from issuance of shares
32,301

 
33,003

Repurchase of shares
(22,312
)
 
(28,464
)
Repayment of WPC Credit Facility
(11,637
)
 
(37,000
)
Distributions to noncontrolling interests
(8,630
)
 
(4,787
)
Proceeds from WPC Credit Facility
5,000

 
10,000

Deferred financing costs
(2,323
)
 
(1,959
)
Other financing activities, net
(349
)
 
(1,193
)
Net Cash Used in Financing Activities
(119,172
)
 
(180,701
)
 
 
 
 
Change in Cash and Cash Equivalents and Restricted Cash During the Period
 
 
 
Net increase in cash and cash equivalents and restricted cash
19,144

 
1,078

Cash and cash equivalents and restricted cash, beginning of period
121,130

 
132,376

Cash and cash equivalents and restricted cash, end of period
$
140,274

 
$
133,454


See Notes to Consolidated Financial Statements.

CWI 9/30/2019 10-Q 7



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

Note 1. Business

Organization

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

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

We held ownership interests in 26 hotels at September 30, 2019, including 22 hotels that we consolidate (“Consolidated Hotels”) and four hotels that we record as equity investments (“Unconsolidated Hotels”).

Public Offerings

We raised $575.8 million through our initial public offering, which ran from September 15, 2010 through September 15, 2013, and $577.4 million through our follow-on offering, which ran from December 20, 2013 through December 31, 2014. We have fully invested the proceeds from both our initial public offering and follow-on offering. In addition, from inception through September 30, 2019, $246.0 million of distributions were reinvested in our common stock through our distribution reinvestment plan (“DRIP”).

Proposed Merger

On October 22, 2019, we and Carey Watermark Investors 2 Incorporated (“CWI 2”) announced that we have entered into a definitive merger agreement under which we will merge in an all-stock transaction, with us surviving the merger as a wholly-owned subsidiary of CWI 2. The transaction is expected to close in the first quarter of 2020, subject to the approval of our stockholders and CWI 2’s stockholders, among other conditions. Following the close of the merger, the combined company will complete an internalization transaction with our Advisor and Subadvisor, as a result of which the combined company will become self-managed (Note 13).

Note 2. Basis of Presentation

Basis of Presentation

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

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2018, which are included in our 2018 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

CWI 9/30/2019 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)


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

Basis of Consolidation

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

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2018 Annual Report.

At both September 30, 2019 and December 31, 2018, we considered five entities to be VIEs, four of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2019
 
December 31, 2018
Net investments in hotels
$
495,142

 
$
497,637

Intangible assets, net
37,246

 
37,847

Total assets
568,256

 
576,430

 
 
 
 
Non-recourse debt, net
$
341,955

 
$
344,018

Total liabilities
374,810

 
373,700


Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. In accordance with the SEC’s adoption of certain rule and form amendments on August 17, 2018, we moved Net gain (loss) on sale of real estate in the consolidated statements of operations to be included within Operating Income.

Accounting Policy Update

Transaction Costs — Transaction costs for the three and nine months ended September 30, 2019 are costs incurred in connection with the proposed merger with CWI 2 and related transactions, discussed in Note 1 and Note 13, and included legal, accounting, financial advisory and other transaction costs. These costs are expensed as incurred in the consolidated statements of operations. 

Out-of-Period Adjustment

During the second quarter of 2019, we identified and recorded an out-of-period adjustment related to the accounting for income taxes. We concluded that this error was not material to our consolidated financial statements for any of the current or prior periods. The adjustment is reflected as a $0.5 million decrease to our Provision for income taxes in the consolidated statements of operations for the nine months ended September 30, 2019.


CWI 9/30/2019 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)

Restricted Cash 

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
 
September 30, 2019
 
December 31, 2018
Cash and cash equivalents
$
78,831

 
$
66,593

Restricted cash
61,443

 
54,537

Total cash and cash equivalents and restricted cash
$
140,274

 
$
121,130


Recent Accounting Pronouncements

Pronouncements Adopted as of September 30, 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract: the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, are capitalized and recorded on the balance sheet. For lessors, however, the new standard remains generally consistent with existing guidance, but has been updated to align with certain changes to the lessee model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

We adopted this guidance for our interim and annual periods beginning January 1, 2019 using the modified retrospective method, applying the transition provisions at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented. We elected the package of practical expedients as permitted under the transition guidance, which allowed us to not reassess whether arrangements contain leases, lease classification and initial direct costs. The adoption of the lease standard did not result in a cumulative effect adjustment recognized in the opening balance of retained earnings as of January 1, 2019.

The most significant impact of the adoption of ASU 2016-02 was the recognition of operating lease right-of-use (“ROU”) assets and corresponding lease liabilities primarily related to our ground leases, and to a lesser extent, our parking garage and equipment leases, for which we were the lessee of $52.6 million and $70.5 million, respectively, on January 1, 2019, which included reclassifying below-market ground lease and parking garage lease intangible assets, above-market ground lease intangible liabilities and deferred rent as a component of the ROU asset (a net reclassification of $17.9 million). See Note 10 for additional disclosures of the presentation of these amounts in our consolidated balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments under the lease. We determine if an arrangement contains a lease at contract inception and determine the classification of the lease at commencement. Operating lease ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We do not include renewal options in the lease term when calculating the lease liability unless we are reasonably certain we will exercise the option. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Our variable lease payments may consist of payments based on a percentage of revenue and increases as a result of Consumer Price Index (“CPI”) or other comparable indices. Lease expense for operating lease payments is recognized on a straight-line basis over the term of the lease.

The implicit rate within our operating leases is generally not determinable and, as a result, we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The determination of our incremental borrowing rate requires judgment. We determine our incremental borrowing rate for each lease using estimated baseline mortgage rates. These baseline rates are determined based on a review of current mortgage debt market activity for benchmark securities utilizing a yield curve. The rates are then adjusted for various factors, including level of collateralization and lease term.


CWI 9/30/2019 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees, which will align the accounting for such payments to nonemployees with the existing requirements for share-based payments granted to employees (with certain exceptions). These share-based payments will now be measured at the grant-date fair value of the equity instrument issued. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

Note 3. Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

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

The following tables present a summary of fees we paid; expenses we reimbursed; and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
3,547

 
$
3,534

 
$
10,673

 
$
10,628

Available Cash Distributions
2,537

 
2,478

 
4,905

 
3,450

Personnel and overhead reimbursements
1,679

 
1,681

 
4,948

 
4,584

Interest expense
375

 
325

 
1,133

 
1,015

Disposition fees

 
110

 

 
300

 
$
8,138

 
$
8,128

 
$
21,659

 
$
19,977

 
 
 
 
 
 
 
 
Other Transaction Fees Incurred
 
 
 
 
 
 
 
Capitalized loan refinancing fees
$
528

 
$

 
$
528

 
$
653


The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
 
September 30, 2019
 
December 31, 2018
Amounts Due to Related Parties and Affiliates
 
 
 
Reimbursable costs due to our Advisor
$
1,469

 
$
1,785

Other amounts due to our Advisor
1,172

 
1,184

Accrued interest on WPC Credit Facility
375

 
2,082

Due to other related parties and affiliates
24

 
1,207

 
$
3,040

 
$
6,258



CWI 9/30/2019 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)

Asset Management Fees, Disposition Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.5% of the aggregate average market value of our investments, as described in the Advisory Agreement. Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement are met. If our Advisor elects to receive all or a portion of its fees in shares of our common stock, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share (“NAV”). For both the nine months ended September 30, 2019 and 2018, we settled $10.7 million of asset management fees in shares of our common stock at our Advisor’s election. At September 30, 2019, our Advisor owned 5,301,305 shares (3.7%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Available Cash Distributions

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

Personnel and Overhead Reimbursements/Reimbursable Costs

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

Other Amounts Due to our Advisor

This balance primarily represented asset management fees payable to our Advisor.

Other Transactions with Affiliates

WPC Credit Facility

On September 26, 2017, we entered into a secured credit facility (the “WPC Credit Facility”) with our Operating Partnership as borrower and WPC as lender. The WPC Credit Facility consists of (i) a bridge term loan of up to $75.0 million (the “Bridge Loan”) for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara Venture and (ii) a $25.0 million revolving working capital facility (the “Working Capital Facility”) to be used for our working capital needs. The Bridge Loan was scheduled to mature on September 30, 2019; however, effective September 26, 2019, the Bridge Loan was extended on its existing terms to December 31, 2019, with the option to extend the maturity date to March 31, 2020 at our election. Effective as of the same date, the Working Capital Facility, which is currently scheduled to mature on December 31, 2019, also has the option to extend the maturity date to March 31, 2020 at our election. Upon exercise of the three-month extension, the interest rate for both loans would increase to the London Interbank Offered Rate (“LIBOR”) plus 3.0% from the current interest rate of LIBOR plus 1.0%. If the Advisory Agreement expires or is terminated, both the Bridge Loan and the Working Capital Facility would mature at that time. We serve as guarantor of the WPC Credit Facility and have pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. At December 31, 2018, the outstanding balances under the Bridge Loan and Working Capital Facility were $40.8 million and $0.8 million, respectively. At September 30, 2019, the outstanding balance under the Bridge Loan was $35.0 million. No balance was outstanding under the Working Capital Facility at September 30, 2019, with $25.0 million available to be drawn at that date.


CWI 9/30/2019 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)

On October 28, 2019, we repaid $5.0 million towards the Bridge Loan (Note 13).

The WPC Credit Facility includes various customary affirmative and negative covenants. We were in compliance with all applicable covenants at September 30, 2019.

Jointly Owned Investments

At September 30, 2019, we owned interests in three ventures with CWI 2: the Ritz-Carlton Key Biscayne, a Consolidated Hotel, and the Marriott Sawgrass Golf Resort & Spa and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third-party also owns an interest in the Ritz-Carlton Key Biscayne.

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
September 30, 2019
 
December 31, 2018
Buildings
$
1,471,111

 
$
1,552,365

Land
337,344

 
355,082

Building and site improvements
158,079

 
149,323

Furniture, fixtures and equipment
103,232

 
108,907

Construction in progress
15,809

 
10,298

Hotels, at cost
2,085,575

 
2,175,975

Less: Accumulated depreciation
(295,974
)
 
(266,323
)
Net investments in hotels
$
1,789,601

 
$
1,909,652


During the nine months ended September 30, 2019 and 2018, we retired fully depreciated furniture, fixtures and equipment aggregating $9.8 million and $24.7 million, respectively.

Depreciation expense was $18.7 million and $18.3 million for the three months ended September 30, 2019 and 2018, respectively, and $56.7 million and $56.5 million for the nine months ended September 30, 2019 and 2018, respectively.

Hurricane-Related Disruption

Below is a summary of the items that comprised the gain recognized related to Hurricane Irma (in thousands):
 
Three Months Ended September 30,
 
2019
 
2018
Net write-off of fixed assets
$
1,012

 
$
3,351

Remediation work performed (a)

 
(1,062
)
Property damage insurance receivables
(1,892
)
 
(2,330
)
Gain on hurricane-related property damage
$
(880
)
 
$
(41
)

 
Nine Months Ended September 30,
 
2019
 
2018
Net write-off of fixed assets
$
3,071

 
$
8,811

Remediation work performed

 
5,428

Property damage insurance receivables
(3,951
)
 
(15,345
)
Gain on hurricane-related property damage
$
(880
)
 
$
(1,106
)
___________
(a) For the three months ended September 30, 2018, this represents a change in estimated costs for remediation work incurred.


CWI 9/30/2019 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)

As of September 30, 2019, we have received cumulative business interruption insurance proceeds related to Hurricane Irma of $24.6 million. We recorded business interruption income related to Hurricane Irma in the consolidated statements of operations of $2.8 million and $5.8 million during the three months ended September 30, 2019 and 2018, respectively, and $3.6 million and $16.3 million during the nine months ended September 30, 2019 and 2018, respectively.

As the restoration work continues to be performed, the estimated total cost will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed.

Property Dispositions

2019 Activity

On September 17, 2019, we sold our 100% ownership interest in the Courtyard San Diego Mission Valley to an unaffiliated third party for a contractual sales price of $79.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $33.6 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $5.9 million during the third quarter of 2019 in connection with this transaction.

2018 Activity

On January 25, 2018, we sold our 100% ownership interest in the Marriott Boca Raton at Boca Center to an unaffiliated third party for a contractual sales price of $76.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $35.4 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $12.3 million during the first quarter of 2018 in connection with this transaction.

On February 5, 2018, we sold our 100% ownership interests in the Hampton Inn Memphis Beale Street and Hampton Inn Atlanta Downtown to an unaffiliated third party for a contractual sales price totaling $63.0 million, with net proceeds after the repayment of the related mortgage loans of approximately $31.8 million, including the release of $2.0 million of restricted cash. We recognized a gain on sale totaling $19.6 million during the first quarter of 2018 in connection with this transaction.

On September 27, 2018, we sold our 100% ownership interest in the Staybridge Suites Savannah Historic District to an unaffiliated third party for a contractual sales price of $22.0 million, with net proceeds after the defeasance of the related mortgage loan of approximately $6.7 million. We recognized a loss on sale of $0.7 million during the third quarter of 2018 in connection with this transaction, as well as a $0.3 million loss on extinguishment of debt in connection with the defeasance of the loan.

Assets and Liabilities Held for Sale

At September 30, 2019, the Hilton Garden Inn New Orleans French Quarter/CBD was classified as held for sale. The hotel was subsequently sold on October 9, 2019 (Note 13). No properties were classified as held for sale as of December 31, 2018.

Below is a summary of our assets and liabilities held for sale (in thousands):
 
September 30, 2019
Net investments in hotels
$
15,119

Other assets
84

Assets held for sale
$
15,203

 
 
Non-recourse debt, net attributable to Assets held for sale
$
14,630

 
 
Other liabilities held for sale
$
208



CWI 9/30/2019 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)

Construction in Progress

At September 30, 2019 and December 31, 2018, construction in progress, recorded at cost, was $15.8 million and $10.3 million, respectively, and related to planned renovations at certain of our hotels. Upon substantial completion of renovation work, costs are reclassified from construction in progress to buildings, building and site improvements and furniture, fixture and equipment, as applicable, and depreciation will commence.

We capitalize qualifying interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.7 million and $1.1 million of such costs during the three months ended September 30, 2019 and 2018, respectively, and $1.2 million and $2.6 million during the nine months ended September 30, 2019 and 2018, respectively. At September 30, 2019 and December 31, 2018, accrued capital expenditures were $2.2 million and $5.5 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At September 30, 2019, we owned equity interests in four Unconsolidated Hotels, two with unrelated third parties and two with CWI 2. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Advisor that we incur and other-than-temporary impairment charges, if any).

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

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
Unconsolidated Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Hotel Type
 
Carrying Value at
 
 
 
 
 
September 30, 2019
 
December 31, 2018
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)
 
CA
 
358

 
40%
 
Resort
 
$
53,371

 
$
56,814

Ritz-Carlton Philadelphia Venture (c)
 
PA
 
301

 
60%
 
Full-service
 
27,239

 
29,951

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

 
50%
 
Resort
 
25,826

 
25,439

Hyatt Centric French Quarter Venture (f)
 
LA
 
254

 
80%
 
Full-service
 
454

 
511

 
 
 
 
1,427

 
 
 
 
 
$
106,890

 
$
112,715

___________
(a)
This investment represents a tenancy-in-common interest; the remaining 60.0% interest is owned by CWI 2.
(b)
We received net cash distributions of $4.7 million and $1.3 million from this investment during the three and nine months ended September 30, 2019, respectively, which included our share of key money received from Marriott during the third quarter of 2019.
(c)
We received cash distributions of $0.8 million and $1.7 million from this investment during the three and nine months ended September 30, 2019, respectively.
(d)
We received cash distributions of $1.8 million from this investment during the nine months ended September 30, 2019. No cash distributions were received during the three months ended September 30, 2019.
(e)
This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence, but does not give us power over decisions that significantly affect the economic performance of the entity.
(f)
We received cash distributions of $1.1 million from this investment during the nine months ended September 30, 2019. No cash distributions were received during the three months ended September 30, 2019.


CWI 9/30/2019 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which is based on the HLBV model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Venture
 
2019
 
2018
 
2019
 
2018
Marriott Sawgrass Golf Resort & Spa Venture
 
$
(955
)
 
$
(497
)
 
$
2,185

 
$
1,614

Ritz-Carlton Bacara, Santa Barbara Venture
 
199

 
(196
)
 
(2,124
)
 
(3,034
)
Hyatt Centric French Quarter Venture
 
(19
)
 
387

 
1,085

 
1,443

Ritz-Carlton Philadelphia Venture
 
16

 
(283
)
 
(1,045
)
 
(1,066
)
Westin Atlanta Venture (a)
 

 

 

 
505

Total equity in (losses) earnings of equity method investments in real estate, net
 
$
(759
)
 
$
(589
)
 
$
101

 
$
(538
)
___________
(a)
On October 19, 2017, the venture sold the Westin Atlanta Perimeter North to an unaffiliated third party. Our share of equity in earnings during the nine months ended September 30, 2018 was the result of additional cash distributions received in that period in connection with the disposition.

No other-than-temporary impairment charges related to our investments in these ventures were recognized during the three or nine months ended September 30, 2019 or 2018.

At September 30, 2019 and December 31, 2018, the unamortized basis differences on our equity investments were $6.3 million and $7.3 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.1 million for both the three months ended September 30, 2019 and 2018 and by $0.3 million for both the nine months ended September 30, 2019 and 2018.

Hurricane-Related Disruption

The Marriott Sawgrass Golf Resort & Spa was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a short period of time. Below is a summary of the items that comprised the loss (gain) recognized by the venture related to Hurricane Irma (in thousands):
 
Three Months Ended September 30,
 
2019
 
2018
Net write-off of fixed assets
$

 
$
147

Remediation work performed

 
6

Decrease in property damage insurance receivables

 
5

Loss on hurricane-related property damage
$

 
$
158

 
Nine Months Ended September 30,
 
2019
 
2018
Net write-off (write-up) of fixed assets
$
3,586

 
$
(279
)
Remediation work performed

 
118

(Increase) decrease in property damage insurance receivables
(3,596
)
 
909

(Gain) loss on hurricane-related property damage (a)
$
(10
)
 
$
748

___________
(a)
Includes losses totaling $1.3 million during the nine months ended September 30, 2018 resulting from pre-existing damage (which was discovered as a result of the hurricane and is not covered by insurance).

As the restoration work continues to be performed, the estimated total costs will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed. 


CWI 9/30/2019 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets and Liabilities

Intangible assets and liabilities are summarized as follows (dollars in thousands):
 
 
 
September 30, 2019
 
December 31, 2018
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Villa/condo rental programs
45 - 55
 
$
72,400

 
$
(7,648
)
 
$
64,752

 
$
72,400

 
$
(6,520
)
 
$
65,880

Below-market hotel ground leases and parking garage lease (a)
10 - 93
 

 

 

 
10,935

 
(645
)
 
10,290

Other intangible assets
8 - 15
 
855

 
(423
)
 
432

 
855

 
(354
)
 
501

Total intangible assets, net
 
 
$
73,255

 
$
(8,071
)
 
$
65,184

 
$
84,190

 
$
(7,519
)
 
$
76,671

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease (a)
85
 
$

 
$

 
$

 
$
(2,100
)
 
$
114

 
$
(1,986
)
___________
(a)
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) (Note 2). As a result of adopting this guidance, on January 1, 2019, we reclassified our below-market ground lease and parking garage lease intangible assets (previously included in Intangible assets, net) and above-market ground lease intangible liabilities (previously included in Accounts payable, accrued expenses and other liabilities) to Operating lease ROU assets on the consolidated balance sheet.

Net amortization of intangibles was $0.4 million for both the three months ended September 30, 2019 and 2018, and $1.1 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively. Amortization of the villa/condo rental programs and in-place lease intangibles are included in Depreciation and amortization in the consolidated financial statements.

Note 7. Fair Value Measurements

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

Items Measured at Fair Value on a Recurring Basis

Derivative Assets — Our derivative assets, which are included in Other assets in the consolidated financial statements, are comprised of interest rate caps (Note 8).

The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.


CWI 9/30/2019 10-Q 17


Notes to Consolidated Financial Statements (Unaudited)

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the nine months ended September 30, 2019 or 2018. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income in the consolidated financial statements.

Our non-recourse debt, net, which we have classified as Level 3, had a carrying value of $1.3 billion at both September 30, 2019 and December 31, 2018 and an estimated fair value of $1.3 billion at both September 30, 2019 and December 31, 2018. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both September 30, 2019 and December 31, 2018.

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

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. We did not recognize any impairment charges during the three or nine months ended September 30, 2019 or 2018.

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

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

Derivative Financial Instruments

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

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

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated as Hedging Instruments 
 
 
 
Asset Derivatives Fair Value at
 
Balance Sheet Location
 
September 30, 2019
 
December 31, 2018
Interest rate caps
 
Other assets
 
$
4

 
$
84



CWI 9/30/2019 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both September 30, 2019 and December 31, 2018, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized losses of less than $0.1 million and unrealized income of less than $0.1 million in Other comprehensive income on derivatives in connection with our interest rate swaps and caps during the three months ended September 30, 2019 and 2018, respectively, and unrealized losses of $0.2 million and unrealized income of $0.1 million during the nine months ended September 30, 2019 and 2018, respectively.

We reclassified $0.2 million and less than $0.1 million from Other comprehensive income on derivatives into Interest expense during the three months ended September 30, 2019 and 2018, respectively, and $0.2 million and $0.4 million during the nine months ended September 30, 2019 and 2018, respectively.

Amounts reported in Other comprehensive income related to interest rate caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. At September 30, 2019, we estimated that an additional $0.2 million will be reclassified as Interest expense during the next 12 months related to our interest rate caps.

Interest Rate Swaps and Caps

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

The interest rate caps that we had outstanding on our Consolidated Hotels at September 30, 2019 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 Instruments
 
 
 
Fair Value at
Interest Rate Derivatives
 
 
Notional Amount
 
September 30, 2019
Interest rate caps
 
8
 
$
356,070

 
$
4


Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2019. At September 30, 2019, both our total credit exposure and the maximum exposure to any single counterparty were less than $0.1 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2019, we had not been declared in default on any of our derivative obligations. At both September 30, 2019 and December 31, 2018, we had no derivatives that were in a net liability position.


CWI 9/30/2019 10-Q 19


Notes to Consolidated Financial Statements (Unaudited)

Note 9. Debt

Non-Recourse Debt

Our non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
Carrying Amount at
 
 
Interest Rate Range
 
Current Maturity Date Range (a)
 
September 30, 2019
 
December 31, 2018
Fixed rate
 
3.6% – 5.9%
 
7/2020 – 4/2024
 
$
939,233

 
$
1,026,451

Variable rate (b)
 
4.4% – 7.9%
 
 3/2020 – 7/2022
 
335,614

 
299,563

 
 
 
 
 
 
$
1,274,847

 
$
1,326,014

___________
(a)
Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.
(b)
The interest rate range presented for these mortgage loans reflect the rates in effect at September 30, 2019 through the use of an interest rate cap, when applicable.

Financing Activity During 2019

Hilton Garden Inn New Orleans French Quarter/CBD

During the third quarter of 2019, we refinanced the $10.0 million Hilton Garden Inn New Orleans French Quarter/CBD mortgage loan with a new mortgage loan of up to $18.0 million, of which $15.0 million was funded at closing. The loan has a floating annual interest rate of LIBOR plus 2.8% (subject to an interest rate cap) and a maturity date of July 1, 2022, with two one-year extension options. No gain or loss was recognized on the extinguishment of debt. This hotel was subsequently sold on October 9, 2019 (Note 13).

Sheraton Austin Hotel at the Capitol

During the second quarter of 2019, we refinanced the $67.0 million Sheraton Austin Hotel at the Capitol mortgage loan with a new mortgage loan that has a maximum principal amount of $92.4 million, of which we drew $68.4 million at closing, with the remaining balance available to fund planned renovations at the hotel. The loan has a floating annual interest rate of LIBOR plus 3.5% (subject to an interest rate cap) and a maturity date of July 9, 2022 with two one-year extension options. We recognized a loss on extinguishment of debt of $0.1 million on this refinancing during the second quarter of 2019.


CWI 9/30/2019 10-Q 20


Notes to Consolidated Financial Statements (Unaudited)

Lake Arrowhead Resort and Spa

The $14.5 million outstanding mortgage loan on Lake Arrowhead Resort and Spa that matured on May 29, 2019 was modified during the second quarter of 2019 to extend the maturity date to April 30, 2020. As part of this modification, we began making monthly amortization payments of $40,000 that will continue through the maturity date.

Financing Activity During 2018

On June 15, 2018, we refinanced the Ritz-Carlton Fort Lauderdale senior mortgage and mezzanine loans totaling $49.0 million and $21.0 million, respectively, with new senior mortgage and mezzanine loans totaling $47.0 million and $28.3 million, respectively, which have floating annual interest rates of LIBOR plus 2.3% and LIBOR plus 5.8%, respectively, although we have entered into interest rate cap agreements with respect to each of these loans. Both loans have terms of three years. We recognized a net loss on extinguishment of debt of $0.2 million on these refinancings during the nine months ended September 30, 2018.

On September 27, 2018, in connection with the sale of the Staybridge Suites Savannah Historic District (Note 4), we defeased the outstanding $14.4 million mortgage loan on the hotel and recognized a $0.3 million loss on extinguishment of debt during both the three and nine months ended September 30, 2018.

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. Except as discussed below, at September 30, 2019, we were in compliance with the applicable covenants for each of our mortgage loans.

At March 31, 2018, the minimum debt service coverage ratio for the Courtyard Pittsburgh Shadyside was not met; this ratio was still not met as of September 30, 2019 and we have entered into a cash management agreement with the lender.

At September 30, 2018, the minimum debt service coverage ratio for the Westin Minneapolis was not met and we entered into a cash management agreement that permits the lender to sweep the excess cash flow from the hotel. As of September 30, 2019, this ratio was still not met and the cash management agreement remained in effect.

At September 30, 2018, the minimum debt service coverage ratio for the Equinox, a Luxury Collection Golf Resort & Spa was not met; this ratio was still not met as of September 30, 2019 and we have entered into a cash management agreement with the lender.

At December 31, 2018, the minimum debt yield ratio for the Sanderling Resort was not met; therefore, in May 2019, the loan began to amortize in an amount equal to the original loan amount over a 25-year period and will continue to amortize until such time as the minimum debt yield ratio is met. As of September 30, 2019, this ratio was still not met.

At September 30, 2019, the minimum debt service coverage ratio for the Holiday Inn Manhattan 6th Avenue Chelsea was not met and we entered into a cash management agreement that permits the lender to sweep the excess cash flow from the hotel.


CWI 9/30/2019 10-Q 21


Notes to Consolidated Financial Statements (Unaudited)

WPC Credit Facility

At September 30, 2019, we had an outstanding balance under the Bridge Loan of $35.0 million. At September 30, 2019, no amount was outstanding under the Working Capital Facility; therefore $25.0 million was available to be drawn. These loans are described in Note 3.

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2019 and each of the next five calendar years following December 31, 2019 are as follows (in thousands):
Years Ending December 31,
 
Total
2019 (remainder) (a)
 
$
40,033

2020
 
238,389

2021
 
533,523

2022
 
327,435

2023
 
126,618

2024
 
50,252

Total principal payments
 
1,316,250

Unamortized deferred financing costs
 
(6,403
)
Total
 
$
1,309,847

___________
(a)
Includes $35.0 million of scheduled payments on the Bridge Loan to WPC (Note 3).

Note 10. Commitments and Contingencies

At September 30, 2019, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Hotel Management Agreements

As of September 30, 2019, our Consolidated Hotel properties were operated pursuant to long-term management agreements with 12 different management companies, with initial terms ranging from five to 30 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.5% to 3.5% of hotel revenues. Four of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 3.5% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $3.5 million and $4.5 million for the three months ended September 30, 2019 and 2018, respectively, and $13.0 million and $14.0 million for the nine months ended September 30, 2019 and 2018, respectively.

Franchise Agreements

Fifteen of our Consolidated Hotels operate under franchise or license agreements with national brands that are separate from our management agreements. As of September 30, 2019, we had 10 franchise agreements with Marriott-owned brands, three with Hilton-owned brands, one with an InterContinental Hotels-owned brand and one with a Hyatt-owned brand related to our Consolidated Hotels. Our typical franchise agreements have initial terms ranging from 15 to 25 years. Three of our hotels are not operated with a hotel brand so the hotels do not have franchise agreements. Generally, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.5% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial

CWI 9/30/2019 10-Q 22


Notes to Consolidated Financial Statements (Unaudited)

statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $4.4 million and $3.9 million for the three months ended September 30, 2019 and 2018, respectively, and $12.7 million and $12.3 million for the nine months ended September 30, 2019 and 2018, respectively.

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures sufficient to cover the cost of routine improvements and alterations at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. At both September 30, 2019 and December 31, 2018$37.9 million was held in furniture, fixtures and equipment reserve accounts for future capital expenditures, and is included in Restricted cash in the consolidated financial statements.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. At September 30, 2019, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts at September 30, 2019 totaled $22.1 million. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources, proceeds available under our Working Capital Facility and/or other sources of available capital, including cash flow from operations.

Leases

Lease Obligations

We recognize an operating ROU asset and a corresponding lease liability for ground lease arrangements, hotel parking leases and various hotel equipment leases for which we are the lessee. Our leases have remaining lease terms ranging from less than one year to 88 years (excluding extension options not reasonably certain of being exercised).

Lease Cost

Certain information related to the total lease cost for operating leases for the three and nine months ended September 30, 2019 is as follows (in thousands):
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Fixed lease cost
$
3,317

 
$
10,281

Variable lease cost (a)
239

 
614

Total lease cost
$
3,556

 
$
10,895

___________
(a)
Our variable lease payments consist of payments based on a percentage of revenue.


CWI 9/30/2019 10-Q 23


Notes to Consolidated Financial Statements (Unaudited)

Other Information

Supplemental balance sheet information related to ROU assets and lease liabilities is as follows (dollars in thousands):
 
September 30, 2019
Operating lease ROU assets
$
47,461

Operating lease liabilities
71,540

 
 
Weighted-average remaining lease term
69.2 years

Weighted-average discount rate
9.1
%

Cash paid for operating lease liabilities included in Net cash provided by operating activities totaled $4.1 million for the nine months ended September 30, 2019.

Undiscounted Cash Flows

A reconciliation of the undiscounted cash flows for operating leases recorded on the consolidated balance sheet as of September 30, 2019 is as follows (in thousands):
Years Ending December 31,
 
Total
2019 (remainder)
 
$
1,384

2020
 
5,517

2021
 
5,425

2022
 
5,428

2023
 
5,326

Thereafter through 2107
 
903,189

Total lease payments
 
926,269

Less: amount of lease payments representing interest
 
(854,729
)
Present value of future lease payments/lease obligations
 
$
71,540


Scheduled future minimum ground lease payments for the years subsequent to the year ended December 31, 2018 were: $4.1 million for 2019, $4.2 million for 2020, $4.3 million for 2021, $4.4 million for 2022, $4.5 million for 2023 and $811.3 million for the years thereafter.


CWI 9/30/2019 10-Q 24


Notes to Consolidated Financial Statements (Unaudited)

Note 11. Equity

Reclassifications Out of Accumulated Other Comprehensive Loss

The following table presents a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
 
 
Three Months Ended September 30,
Gains and Losses on Derivative Instruments
 
2019
 
2018
Beginning balance
 
$
(420
)
 
$
(26
)
Other comprehensive (loss) income before reclassifications
 
(22
)
 
40

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
176

 
46

Equity in (losses) earnings of equity method investments in real estate, net
 
6

 

Total
 
182

 
46

Net current period other comprehensive income
 
160

 
86

Net current period other comprehensive income attributable to noncontrolling interests
 
(6
)
 
(1
)
Ending balance
 
$
(266
)
 
$
59


 
 
Nine Months Ended September 30,
Gains and Losses on Derivative Instruments
 
2019
 
2018
Beginning balance
 
$
(286
)
 
$
(455
)
Other comprehensive (loss) income before reclassifications
 
(199
)
 
85

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
217

 
426

Equity in (losses) earnings of equity method investments in real estate, net
 
10

 

Total
 
227

 
426

Net current period other comprehensive income
 
28

 
511

Net current period other comprehensive (income) loss attributable to noncontrolling interests
 
(8
)
 
3

Ending balance
 
$
(266
)
 
$
59


Distributions Declared

During the third quarter of 2019, our board of directors declared a quarterly distribution of $0.1425 per share, which was paid on October 15, 2019 to stockholders of record on September 30, 2019, in the aggregate amount of $20.2 million.

Note 12. Income Taxes

We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100.0% of our taxable income annually and intend to do so for the tax year ending December 31, 2019. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three and nine months ended September 30, 2019 and 2018. We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.


CWI 9/30/2019 10-Q 25


Notes to Consolidated Financial Statements (Unaudited)

Certain of our subsidiaries have elected taxable REIT subsidiary (“TRS”) status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying consolidated financial statements include an interim tax provision for our TRSs for the three and nine months ended September 30, 2019 and 2018. Current income tax expense was $1.0 million and current income tax benefit was $0.4 million for the three months ended September 30, 2019 and 2018, respectively, and current income tax expense was $1.9 million and $1.8 million for the nine months ended September 30, 2019 and 2018, respectively.

Our TRSs are subject to U.S. federal and state income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. The majority of our deferred tax assets relate to net operating losses, interest expense limitation and accrued expenses. The majority of our deferred tax liabilities relate to differences between the tax basis and financial reporting basis of our villa/condo rental management agreements. Provision for income taxes included deferred income tax expense of $0.1 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively, and deferred income tax expense of $0.3 million and $1.7 million for the nine months ended September 30, 2019 and 2018, respectively.

Note 13. Subsequent Events

Proposed Merger

On October 22, 2019, we entered into a merger agreement with CWI 2, along with one of its wholly-owned subsidiaries (the “Merger Agreement”), pursuant to which we will merge with one of CWI 2’s subsidiaries and will survive as a wholly-owned subsidiary of CWI 2. In accordance with the Merger Agreement, we and CWI 2 also entered into agreements to internalize the management of the combined company following the merger. If the proposed merger is consummated, each share of our issued and outstanding common stock will be exchanged for 0.9106 shares of CWI 2’s Class A common stock, $0.001 par value per share. It is expected that our stockholders will own approximately 58% of the outstanding common stock of the combined company, and CWI 2’s stockholders will own approximately 42%, immediately after the closing of the merger. Further details concerning the proposed merger are described in a Form 8-K that we filed with the SEC on October 22, 2019.

Disposition

On October 9, 2019, the Hilton Garden Inn New Orleans French Quarter/CBD venture sold the hotel to an unaffiliated third party for a contractual sales price of $26.0 million, resulting in a gain on sale of real estate. We owned an 88% controlling ownership interest in the venture (Note 4).

WPC Credit Facility

On October 28, 2019, we repaid $5.0 million towards the Bridge Loan (Note 3).


CWI 9/30/2019 10-Q 26



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

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2018 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Business Overview

As described in more detail in Item 1 of the 2018 Annual Report, we are a publicly-owned, non-traded REIT that invests in, and through our Advisor, manages and seeks to enhance the value of, interests in lodging and lodging-related properties. We have invested the proceeds from our initial public offering and follow-on offering in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality and by hotel renovations. We have invested in hotels and then initiated significant renovations at certain hotels. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. At September 30, 2019, we held ownership interests in 26 hotels, with a total of 7,396 rooms.

Significant Developments

Proposed Merger

On October 22, 2019, we entered into a merger agreement with CWI 2, along with one of its wholly-owned subsidiaries, pursuant to which we will merge with and into one of CWI 2’s subsidiaries and will survive as a wholly-owned subsidiary of CWI 2. In accordance with the Merger Agreement, we and CWI 2 also entered into agreements to internalize the management of the combined companies following the merger. If the proposed merger is consummated, each share of our issued and outstanding common stock will be canceled and, in exchange for cancellation of such share, the rights attaching to such share will be converted automatically into the right to receive 0.9106 shares of validly issued, fully paid and nonassessable shares of CWI 2’s Class A common stock, $0.001 par value per share. Further details concerning the proposed merger are described in a Form 8-K that we filed with the SEC on October 22, 2019.

Disposition Activity

On October 9, 2019, the Hilton Garden Inn New Orleans French Quarter/CBD venture sold the hotel to an unaffiliated third party for a contractual sales price of $26.0 million. We owned an 88% controlling ownership interest in the venture.

On September 17, 2019, we sold our 100% ownership interest in the Courtyard San Diego Mission Valley to an unaffiliated third party for a contractual sales price of $79.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $33.6 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $5.9 million during the third quarter of 2019 in connection with this transaction.

WPC Credit Facility

We entered into an agreement effective September 26, 2019 that extended the maturity date of our Bridge Loan, on its existing terms, to December 31, 2019, with the option to extend the maturity to March 31, 2020, at our election. As part of this agreement, the Working Capital Facility, which is currently scheduled to mature on December 31, 2019, now has an option to extend the maturity date to March 31, 2020 at our election. Upon exercise of the three-month extension, the interest rate for both loans would increase to LIBOR plus 3.0% from the current interest rate of LIBOR plus 1.0%. At September 30, 2019, the outstanding balance under the Bridge Loan was $35.0 million. No balance was outstanding under the Working Capital Facility at September 30, 2019. On October 28, 2019, we repaid $5.0 million towards the Bridge Loan.


CWI 9/30/2019 10-Q 27



Financial and Operating Highlights

(Dollars in thousands, except average daily rate (“ADR”) and revenue per available room (“RevPAR”))
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019