Document
Table of Contents







UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number 1-14045 
___________________________________
LASALLE HOTEL PROPERTIES
(Exact name of registrant as specified in its charter) 
___________________________________
Maryland
 
36-4219376
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
7550 Wisconsin Avenue, 10th Floor
Bethesda, Maryland
 
20814
(Address of principal executive offices)
 
(Zip Code)
(301) 941-1500
(Registrant’s telephone number, including area code) 
___________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
 
 
 
 
 
 
 
  
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.
Class
 
Outstanding at July 19, 2017
Common Shares of Beneficial Interest ($0.01 par value)
 
113,212,646

6.375% Series I Cumulative Redeemable Preferred Shares ($0.01 par value)
 
4,400,000

6.3% Series J Cumulative Redeemable Preferred Shares ($0.01 par value)
 
6,000,000



Table of Contents







LASALLE HOTEL PROPERTIES
INDEX

PART I.
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


Table of Contents







PART I.
Financial Information
 
Item 1.
Financial Statements
LASALLE HOTEL PROPERTIES
Consolidated Balance Sheets
(in thousands, except share data)
 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets:
 
 
 
Investment in hotel properties, net (Note 3)
$
3,300,353

 
$
3,672,209

Property under development
23,288

 
21,078

Assets held for sale (Note 3)
0

 
23,283

Cash and cash equivalents
461,351

 
134,652

Restricted cash reserves (Note 5)
13,166

 
15,035

Hotel receivables (net of allowance for doubtful accounts of $409 and $279, respectively)
43,352

 
35,403

Debt issuance costs for borrowings under credit facilities, net
3,820

 
1,699

Deferred tax assets
2,130

 
1,902

Prepaid expenses and other assets
46,669

 
38,818

Total assets
$
3,894,129

 
$
3,944,079

Liabilities:
 
 
 
Borrowings under credit facilities (Note 4)
$
0

 
$
0

Term loans, net of unamortized debt issuance costs (Note 4)
852,987

 
852,758

Bonds payable, net of unamortized debt issuance costs (Note 4)
42,472

 
42,455

Mortgage loan, net of unamortized debt issuance costs (Note 4)
223,970

 
223,494

Accounts payable and accrued expenses
152,705

 
171,965

Liabilities of assets held for sale (Note 3)
0

 
247

Advance deposits
36,753

 
33,232

Accrued interest
2,136

 
2,209

Distributions payable
55,129

 
56,360

Total liabilities
1,366,152

 
1,382,720

Commitments and contingencies (Note 5)

 

Equity:
 
 
 
Shareholders’ Equity:
 
 
 
Preferred shares of beneficial interest, $0.01 par value (liquidation preference of $260,000 and $328,750, respectively), 40,000,000 shares authorized; 10,400,000 and 13,150,000 shares issued and outstanding, respectively (Note 6)
104

 
132

Common shares of beneficial interest, $0.01 par value, 200,000,000 shares authorized; 113,219,482 shares issued and 113,193,206 shares outstanding, respectively, and 113,115,442 shares issued and 113,088,074 shares outstanding, respectively (Note 6)
1,132

 
1,131

Treasury shares, at cost (Note 6)
(16
)
 
(739
)
Additional paid-in capital, net of offering costs of $82,842 and $85,223, respectively
2,766,232

 
2,830,740

Accumulated other comprehensive income (Note 4)
3,296

 
2,365

Distributions in excess of retained earnings
(246,128
)
 
(275,564
)
Total shareholders’ equity
2,524,620

 
2,558,065

Noncontrolling Interests:
 
 
 
Noncontrolling interests in consolidated entities
17

 
17

Noncontrolling interests of common units in Operating Partnership (Note 6)
3,340

 
3,277

Total noncontrolling interests
3,357

 
3,294

Total equity
2,527,977

 
2,561,359

Total liabilities and equity
$
3,894,129

 
$
3,944,079

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

1

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LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share data)
(unaudited)
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Hotel operating revenues:
 
 
 
 
 
 
 
Room
$
222,385

 
$
245,286

 
$
400,750

 
$
426,706

Food and beverage
59,308

 
79,025

 
111,612

 
135,372

Other operating department
22,118

 
24,457

 
42,485

 
45,100

Total hotel operating revenues
303,811

 
348,768

 
554,847

 
607,178

Other income
3,233

 
2,319

 
6,602

 
4,013

Total revenues
307,044

 
351,087

 
561,449

 
611,191

Expenses:
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Room
55,271

 
58,963

 
107,594

 
111,254

Food and beverage
40,132

 
49,994

 
79,280

 
92,902

Other direct
2,654

 
4,973

 
6,838

 
8,656

Other indirect (Note 8)
73,177

 
80,283

 
142,833

 
152,198

Total hotel operating expenses
171,234

 
194,213

 
336,545

 
365,010

Depreciation and amortization
44,066

 
48,841

 
91,329

 
96,469

Real estate taxes, personal property taxes and insurance
14,089

 
16,919

 
30,204

 
33,110

Ground rent (Note 5)
3,823

 
4,108

 
7,208

 
7,921

General and administrative
6,917

 
7,643

 
13,471

 
13,473

Other expenses
1,559

 
2,327

 
3,477

 
4,505

Total operating expenses
241,688

 
274,051

 
482,234

 
520,488

Operating income
65,356

 
77,036

 
79,215

 
90,703

Interest income
315

 
1,676

 
457

 
3,330

Interest expense
(9,423
)
 
(11,482
)
 
(19,250
)
 
(23,349
)
Loss from extinguishment of debt (Note 4)
0

 
0

 
(1,706
)
 
0

Income before income tax expense
56,248

 
67,230

 
58,716

 
70,684

Income tax expense (Note 9)
(5,003
)
 
(7,610
)
 
(230
)
 
(1,990
)
Income before gain on sale of properties
51,245

 
59,620

 
58,486

 
68,694

Gain on sale of properties (Note 3)
11,156

 
0

 
85,514

 
0

Net income
62,401

 
59,620

 
144,000

 
68,694

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
(8
)
 
(8
)
 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(83
)
 
(81
)
 
(193
)
 
(96
)
Net income attributable to noncontrolling interests
(91
)
 
(89
)
 
(201
)
 
(104
)
Net income attributable to the Company
62,310

 
59,531

 
143,799

 
68,590

Distributions to preferred shareholders
(4,387
)
 
(4,355
)
 
(9,792
)
 
(7,397
)
Issuance costs of redeemed preferred shares (Note 6)
(2,401
)
 
0

 
(2,401
)
 
0

Net income attributable to common shareholders
$
55,522

 
$
55,176

 
$
131,606

 
$
61,193


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LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income - Continued
(in thousands, except share data)
(unaudited)

 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Earnings per Common Share - Basic (Note 11):
 
 
 
 
 
 
 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.49

 
$
0.49

 
$
1.16

 
$
0.54

Earnings per Common Share - Diluted (Note 11):
 
 
 
 
 
 
 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.49

 
$
0.49

 
$
1.16

 
$
0.54

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
112,951,714

 
112,784,976

 
112,937,794

 
112,766,734

Diluted
113,342,151

 
113,113,253

 
113,347,580

 
113,119,556

 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income
$
62,401

 
$
59,620

 
$
144,000

 
$
68,694

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments (Note 4)
(1,675
)
 
(5,971
)
 
(551
)
 
(20,223
)
Reclassification adjustment for amounts recognized in net income (Note 4)
498

 
1,730

 
1,483

 
3,510

 
61,224

 
55,379

 
144,932

 
51,981

Comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
(8
)
 
(8
)
 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(82
)
 
(76
)
 
(194
)
 
(75
)
Comprehensive income attributable to noncontrolling interests
(90
)
 
(84
)
 
(202
)
 
(83
)
Comprehensive income attributable to the Company
$
61,134

 
$
55,295

 
$
144,730

 
$
51,898

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

3

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LASALLE HOTEL PROPERTIES
Consolidated Statements of Equity
(in thousands, except per share/unit data)
(unaudited)
 
Preferred
Shares of Beneficial Interest
 
Common
Shares of
Beneficial
Interest
 
Treasury
Shares
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive (Loss) Income
 
Distributions
in Excess of
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests in
Consolidated
Entities
 
Noncontrolling Interests of Common Units in Operating Partnership
 
Total Noncontrolling Interests
 
Total Equity
Balance, December 31, 2015
$
72

 
$
1,131

 
$
(4,798
)
 
$
2,684,010

 
$
(97
)
 
$
(306,051
)
 
$
2,374,267

 
$
18

 
$
3,198

 
$
3,216

 
$
2,377,483

Issuance of shares, net of offering costs
60

 
0

 
2,105

 
143,302

 
0

 
0

 
145,467

 
0

 
0

 
0

 
145,467

Repurchase of common shares into treasury
0

 
0

 
(1,597
)
 
0

 
0

 
0

 
(1,597
)
 
0

 
0

 
0

 
(1,597
)
Deferred compensation, net
0

 
0

 
2,981

 
1,277

 
0

 
0

 
4,258

 
0

 
0

 
0

 
4,258

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(151
)
 
(151
)
 
0

 
0

 
0

 
(151
)
Distributions on common shares/units ($0.90 per share/unit)
0

 
0

 
0

 
0

 
0

 
(101,849
)
 
(101,849
)
 
0

 
(131
)
 
(131
)
 
(101,980
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(7,397
)
 
(7,397
)
 
(9
)
 
0

 
(9
)
 
(7,406
)
Net income
0

 
0

 
0

 
0

 
0

 
68,590

 
68,590

 
8

 
96

 
104

 
68,694

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments
0

 
0

 
0

 
0

 
(20,197
)
 
0

 
(20,197
)
 
0

 
(26
)
 
(26
)
 
(20,223
)
Reclassification adjustment for amounts recognized in net income
0

 
0

 
0

 
0

 
3,505

 
0

 
3,505

 
0

 
5

 
5

 
3,510

Balance, June 30, 2016
$
132

 
$
1,131

 
$
(1,309
)
 
$
2,828,589

 
$
(16,789
)
 
$
(346,858
)
 
$
2,464,896

 
$
17

 
$
3,142

 
$
3,159

 
$
2,468,055

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
132

 
$
1,131

 
$
(739
)
 
$
2,830,740

 
$
2,365

 
$
(275,564
)
 
$
2,558,065

 
$
17

 
$
3,277

 
$
3,294

 
$
2,561,359

Issuance of shares, net of offering costs
0

 
0

 
2,397

 
(1,157
)
 
0

 
0

 
1,240

 
0

 
0

 
0

 
1,240

Redemption of preferred shares
(28
)
 
0

 
0

 
(66,341
)
 
0

 
(2,401
)
 
(68,770
)
 
0

 
0

 
0

 
(68,770
)
Repurchase of common shares into treasury
0

 
0

 
(2,314
)
 
0

 
0

 
0

 
(2,314
)
 
0

 
0

 
0

 
(2,314
)
Deferred compensation, net
0

 
1

 
640

 
2,990

 
0

 
0

 
3,631

 
0

 
0

 
0

 
3,631

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(190
)
 
(190
)
 
0

 
0

 
0

 
(190
)
Distributions on common shares/units ($0.90 per share/unit)
0

 
0

 
0

 
0

 
0

 
(101,980
)
 
(101,980
)
 
0

 
(131
)
 
(131
)
 
(102,111
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(9,792
)
 
(9,792
)
 
(8
)
 
0

 
(8
)
 
(9,800
)
Net income
0

 
0

 
0

 
0

 
0

 
143,799

 
143,799

 
8

 
193

 
201

 
144,000

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments
0

 
0

 
0

 
0

 
(550
)
 
0

 
(550
)
 
0

 
(1
)
 
(1
)
 
(551
)
Reclassification adjustment for amounts recognized in net income
0

 
0

 
0

 
0

 
1,481

 
0

 
1,481

 
0

 
2

 
2

 
1,483

Balance, June 30, 2017
$
104

 
$
1,132


$
(16
)

$
2,766,232


$
3,296


$
(246,128
)

$
2,524,620


$
17


$
3,340


$
3,357


$
2,527,977

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

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LASALLE HOTEL PROPERTIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the six months ended
 
June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
144,000

 
$
68,694

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
91,329

 
96,469

Amortization of debt issuance costs
1,429

 
1,713

Loss from extinguishment of debt
1,706

 
0

Gain on sale of properties
(85,514
)
 
0

Amortization of deferred compensation
3,631

 
4,258

Deferred income tax (benefit) expense
(228
)
 
1,321

Allowance for doubtful accounts
130

 
(5
)
Other
1,133

 
245

Changes in assets and liabilities:
 
 
 
Restricted cash reserves
126

 
3,027

Hotel receivables
(12,983
)
 
(14,150
)
Prepaid expenses and other assets
(13,274
)
 
(10,013
)
Accounts payable and accrued expenses
9,800

 
16,685

Advance deposits
7,841

 
8,440

Accrued interest
(73
)
 
(1,111
)
Net cash provided by operating activities
149,053

 
175,573

Cash flows from investing activities:
 
 
 
Additions to properties
(37,492
)
 
(44,841
)
Improvements to properties
0

 
(12,791
)
Purchase of office furniture and equipment
(11
)
 
(10
)
Restricted cash reserves
243

 
133

Proceeds from sale of properties
402,282

 
0

Property insurance proceeds
1,472

 
1,083

Net cash provided by (used in) investing activities
366,494

 
(56,426
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facilities
0

 
431,472

Repayments under credit facilities
0

 
(262,472
)
Repayments of mortgage loans
0

 
(286,294
)
Payment of debt issuance costs
(4,534
)
 
0

Purchase of treasury shares
(2,314
)
 
(1,597
)
Proceeds from issuance of preferred shares
0

 
150,000

Payment of preferred offering costs
0

 
(4,740
)
Payment of common offering costs
0

 
(79
)
Distributions on earned shares from share awards with market conditions
(190
)
 
(151
)
Redemption of preferred shares
(68,750
)
 
0

Distributions on preferred shares
(11,090
)
 
(6,093
)
Distributions on common shares/units
(101,970
)
 
(101,840
)
Net cash used in financing activities
(188,848
)
 
(81,794
)
Net change in cash and cash equivalents
326,699

 
37,353

Cash and cash equivalents, beginning of period
134,652

 
5,700

Cash and cash equivalents, end of period
$
461,351

 
$
43,053

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

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LASALLE HOTEL PROPERTIES
Notes to Consolidated Financial Statements
(in thousands, except share/unit data)
(unaudited)
1.
Organization
LaSalle Hotel Properties (the “Company”), a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”), the Company’s wholly owned taxable REIT subsidiary, is subject to taxation at normal corporate rates.
As of June 30, 2017, the Company owned interests in 41 hotels with approximately 10,450 guest rooms located in seven states and the District of Columbia. Each hotel is leased to LHL (see Note 8) under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2017 and December 2019. Lease revenue from LHL is eliminated in consolidation. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.
Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.9% of the common units of the Operating Partnership at June 30, 2017. The remaining 0.1% is held by limited partners who held 145,223 common units of the Operating Partnership at June 30, 2017. See Note 6 for additional disclosures related to common units of the Operating Partnership.
2.
Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of equity and consolidated statements of cash flows for the periods presented. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 due to seasonal and other factors. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and their subsidiaries in which they have a controlling interest, including joint ventures. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators and reviewed by the Company to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and estimated revenue and expense amounts for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for

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prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income (loss) based on an aggregate estimate, are fairly stated. Also, given the timing of the Company’s disposition of Westin Philadelphia (see Note 3), estimates are included in gain on sale of properties in the consolidated statement of operations and comprehensive income for the three and six months ended June 30, 2017. Any differences between recorded estimated amounts and actual amounts will be recorded in the subsequent quarter.
Investment in Hotel Properties
Upon acquisition, the Company determines the fair value of the acquired long-lived assets, assumed debt and intangible assets and liabilities. The Company’s investments in hotel properties are carried at cost and depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, the shorter of the useful life of the improvement or the term of the related tenant lease for tenant improvements, seven years for land improvements, 20 years for golf course land improvements, 20 years for swimming pool assets and three to five years for furniture, fixtures and equipment. For investments subject to land and building leases that qualify as capital leases, assets are recorded at the estimated fair value of the right to use the leased property at acquisition and depreciated over the shorter of the useful lives of the assets or the term of the respective lease. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.
The Company is required to make subjective assessments as to the useful lives and classification of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company change the expected useful life or classification of particular assets, it would result in a change in depreciation expense and annual net income.
Share-Based Compensation
From time to time, the Company awards shares under the 2014 Equity Incentive Plan, as amended (“2014 Plan”), which has approximately seven years remaining, as compensation to executives, employees and members of the Board of Trustees (see Note 7). The shares issued to executives and employees generally vest over three years. The shares issued to members of the Board of Trustees vest immediately upon issuance. The Company recognizes compensation expense for nonvested shares with service conditions or service and market conditions on a straight-line basis over the vesting period based upon the fair value of the shares on the date of issuance, adjusted for forfeitures. Compensation expense for nonvested shares with service and performance conditions is recognized based on the fair value of the estimated number of shares expected to vest, as revised throughout the vesting period, adjusted for forfeitures. The 2014 Plan replaced the 2009 Equity Incentive Plan (“2009 Plan”) in May 2014.
Noncontrolling Interests
The Company’s consolidated financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations and comprehensive income (loss), revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. Consolidated statements of equity include beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, the Company’s noncontrolling interests that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.
As of June 30, 2017, the consolidated results of the Company include the following ownership interests held by owners other than the Company: (i) the common units in the Operating Partnership held by third parties, (ii) the outside preferred ownership interests in a subsidiary and (iii) the outside ownership interest in a joint venture.

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Variable Interest Entities
The Operating Partnership is a variable interest entity. The Company’s significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is finalizing its evaluation of the effect that ASU No. 2014-09 will have on its consolidated financial statements and related expanded disclosures by working with its hotel operators to analyze its revenue streams and to update its accounting policies. The Company is finalizing its evaluation of each of its revenue streams under the new model and because of the short-term, day-to-day nature of the Company’s hotel revenues the pattern of revenue recognition is not expected to change significantly. Additionally, the Company does not sell hotel properties to customers as defined by FASB, but has historically disposed of hotel properties for cash sales with no contingencies and no future involvement in the hotel operations, and therefore, ASU No. 2014-09 will not impact the recognition of hotel sales. The Company does not believe ASU No. 2014-09 will have a material impact on its consolidated financial statements and is evaluating new disclosure requirements. The Company will adopt the new standard on its effective date of January 1, 2018 under the cumulative effect transition method.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record operating and financing leases as assets and liabilities on the balance sheet and lessors to expense costs that are not initial direct leasing costs. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures. The Company is creating an inventory of its leases and is analyzing its current ground lease obligations. The Company anticipates recording assets and liabilities on its consolidated balance sheets associated with the ground lease obligations under ASU No. 2016-02.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business and adds further guidance in evaluating whether a transaction should be accounted for as an acquisition of an asset or a business. This standard will be effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company early adopted this standard on January 1, 2017.
In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of asset decrecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. This standard will be effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company is evaluating the effect that ASU No. 2017-05 will have on its consolidated financial statements and related disclosures.
3.
Investment in Hotel Properties
Investment in hotel properties as of June 30, 2017 and December 31, 2016 consists of the following:
 
June 30, 2017
 
December 31, 2016
Land
$
624,773

 
$
727,176

Buildings and improvements
3,254,173

 
3,531,280

Furniture, fixtures and equipment
728,771

 
769,671

Investment in hotel properties, gross
4,607,717

 
5,028,127

Accumulated depreciation
(1,307,364
)
 
(1,355,918
)
Investment in hotel properties, net
$
3,300,353

 
$
3,672,209

As of June 30, 2017, buildings and improvements included capital lease assets of $149,457 and accumulated depreciation included amounts related to capital lease assets of $24,808. As of December 31, 2016, buildings and improvements included capital lease assets of $183,503 and accumulated depreciation included amounts related to capital lease assets of $26,230. Depreciation

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of the capital lease assets is included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income for all periods presented.
Depreciation expense was $43,928 and $91,059 for the three and six months ended June 30, 2017, respectively, and $48,706 and $96,200 for the three and six months ended June 30, 2016, respectively.
Dispositions
Upon the sale of a hotel, the Company determines its profit from the sale under the full accrual method provided the following applicable criteria are met: (i) a sale is consummated; (ii) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (iii) the Company’s receivable, if applicable, is not subject to future subordination; (iv) the Company has transferred to the buyer the usual risks and rewards of ownership; and (v) the Company does not have a substantial continuing involvement with the property. If all of these conditions are met, the Company will recognize the full profit on the sale.
During the six months ended June 30, 2017, the Company sold Hotel Deca, Lansdowne Resort, Alexis Hotel, Hotel Triton and Westin Philadelphia. These dispositions do not represent a strategic shift in the Company’s business plan or primary markets, and therefore, do not qualify as discontinued operations. The sale of each property was recorded on the full accrual method.
On January 19, 2017, the Company sold Hotel Deca for $55,000. As of December 31, 2016, Hotel Deca qualified as held for sale. Substantially all of the assets held for sale consisted of investment in hotel properties, net and immaterial prepaid expenses and other assets and the liabilities of assets held for sale consisted of accounts payable and accrued expenses. The Company recognized a gain of $49 and $30,656 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017, respectively. The proceeds were used for general corporate purposes.
On March 22, 2017, the Company sold Lansdowne Resort for $133,000. The Company actualized a decrease in the gain of $148 and recognized a gain of $10,253 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017, respectively. The proceeds were used for general corporate purposes and the redemption of the 7.5% Series H Cumulative Redeemable Preferred Shares (the “Series H Preferred Shares”) on May 4, 2017 (see Note 6).
On March 31, 2017, the Company sold Alexis Hotel for $71,625. The Company recognized a gain of $70 and $33,420 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017, respectively. The proceeds were used for general corporate purposes and the redemption of the Series H Preferred Shares on May 4, 2017 (see Note 6).
On April 11, 2017, the Company sold Hotel Triton for $14,250. The Company recognized a gain of $6,739 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017. The proceeds were used for general corporate purposes and the redemption of the Series H Preferred Shares on May 4, 2017 (see Note 6).
On June 29, 2017, the Company sold Westin Philadelphia for $135,000. The Company recognized a gain of $4,446 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017. The proceeds will be used for general corporate purposes.

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4.
Long-Term Debt
Debt Summary
Debt as of June 30, 2017 and December 31, 2016 consisted of the following:
 
 
 
 
 
 
Balance Outstanding as of
Debt                                                                                  
 
Interest
Rate
 
Maturity
Date
 
June 30,
2017
 
December 31,
2016
Credit facilities
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
Floating (a)
 
January 2021 (a)
 
$
0

 
$
0

LHL unsecured credit facility
 
Floating (b)
 
January 2021 (b)
 
0

 
0

Total borrowings under credit facilities
 
 
 
 
 
0

 
0

Term loans
 
 
 
 
 
 
 
 
First Term Loan
 
Floating/Fixed (c)
 
January 2022
 
300,000

 
300,000

Second Term Loan
 
Floating/Fixed (c)
 
January 2021
 
555,000

 
555,000

Debt issuance costs, net
 
 
 
 
 
(2,013
)
 
(2,242
)
Total term loans, net of unamortized debt issuance costs
 
 
 
852,987

 
852,758

Massport Bonds
 
 
 
 
 
 
 
 
Hyatt Regency Boston Harbor (taxable)
 
Floating (d)
 
March 2018
 
5,400

 
5,400

Hyatt Regency Boston Harbor (tax exempt)
 
Floating (d)
 
March 2018
 
37,100

 
37,100

Debt issuance costs, net
 
 
 
 
 
(28
)
 
(45
)
Total bonds payable, net of unamortized debt issuance costs
 
 
 
42,472

 
42,455

Mortgage loan
 
 
 
 
 
 
 
 
Westin Copley Place
 
Floating (e)
 
August 2018 (e)
 
225,000

 
225,000

Debt issuance costs, net
 
 
 
 
 
(1,030
)
 
(1,506
)
Total mortgage loan, net of unamortized debt issuance costs
 
 
 
223,970

 
223,494

Total debt
 
 
 
 
 
$
1,119,429

 
$
1,118,707


(a) 
Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were no borrowings outstanding at June 30, 2017 and December 31, 2016. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(b) 
Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were no borrowings outstanding at June 30, 2017 and December 31, 2016. LHL has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(c) 
Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into interest rate swaps to effectively fix the interest rates for the First Term Loan (as defined below) and the Second Term Loan (as defined below). At June 30, 2017 and December 31, 2016, the Company had interest rate swaps on the full amounts outstanding. See “Derivative and Hedging Activities” below. At June 30, 2017, the fixed all-in interest rates for the First Term Loan and Second Term Loan were 2.23% and 2.95%, respectively, at the Company’s current leverage ratio (as defined in the swap agreements). At December 31, 2016, the fixed all-in interest rates for the First Term Loan and Second Term Loan were 2.38% and 2.95%, respectively, at the Company’s current leverage ratio (as defined in the swap agreements).
(d) 
The Massport Bonds are secured by letters of credit issued by U.S. Bank National Association that expire in September 2017. The letters of credit have a one-year extension option through September 2018 and are secured by the Hyatt Regency Boston Harbor, however, the letters of credit will not be extended beyond the Massport Bonds’ maturity date. The bonds bear interest based on weekly floating rates. The interest rates as of June 30, 2017 were 1.19% and 0.94% for the $5,400 and $37,100 bonds, respectively. The interest rates as of December 31, 2016 were 0.75% and 0.76% for the $5,400 and $37,100 bonds, respectively. The Company incurs an annual letter of credit fee of 1.35%.
(e) 
The mortgage loan matures on August 14, 2018 with three options to extend the maturity date to January 5, 2021, pursuant to certain terms and conditions. The interest-only mortgage loan bears interest at a variable rate ranging from LIBOR plus 1.75% to LIBOR plus 2.00%, depending on Westin Copley Place’s net cash flow (as defined in the loan agreement). The interest rate as of June 30, 2017 was LIBOR plus 1.75%, which equaled 2.91%. The interest rate as of December 31, 2016

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was LIBOR plus 1.75%, which equaled 2.46%. The mortgage loan allows for prepayments without penalty, subject to certain terms and conditions.
Future scheduled debt principal payments as of June 30, 2017 (refer to previous table for extension options) are as follows:
2017
$
0

2018
267,500

2019
0

2020
0

2021
555,000

Thereafter
300,000

Total debt
$
1,122,500

A summary of the Company’s interest expense and weighted average interest rates for unswapped variable rate debt for the three and six months ended June 30, 2017 and 2016 is as follows:
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Interest Expense:
 
 
 
 
 
 
 
Interest incurred
$
8,852

 
$
10,685

 
$
17,992

 
$
21,869

Amortization of debt issuance costs
664

 
835

 
1,429

 
1,713

Capitalized interest
(93
)
 
(38
)
 
(171
)
 
(233
)
Interest expense
$
9,423

 
$
11,482

 
$
19,250

 
$
23,349

 
 
 
 
 
 
 
 
Weighted Average Interest Rates for Unswapped Variable Rate Debt:
 
 
 
 
 
 
Senior unsecured credit facility
N/A

 
2.15
%
 
N/A

 
2.14
%
LHL unsecured credit facility
N/A

 
2.14
%
 
N/A

 
2.13
%
Massport Bonds
0.87
%
 
0.41
%
 
0.79
%
 
0.26
%
Mortgage loan (Westin Copley Place)
2.76
%
 
2.19
%
 
2.65
%
 
2.18
%
Credit Facilities
On January 10, 2017, the Company refinanced its $750,000 senior unsecured credit facility with a syndicate of banks. As amended, the credit facility now matures on January 8, 2021, subject to two six-month extensions that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The credit facility, with a current commitment of $750,000, includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $1,250,000. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of 0.20% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
On January 10, 2017, LHL also refinanced its $25,000 unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. As amended, the LHL credit facility matures on January 10, 2021, subject to two six-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of 0.20% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the LHL unsecured credit facility.
The Company’s senior unsecured credit facility and LHL’s unsecured credit facility contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.

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The Company and certain of its subsidiaries guarantee the obligations under the Company’s senior unsecured credit facility. While the senior unsecured credit facility does not initially include any pledges of equity interests in the Company’s subsidiaries, in connection with the January 10, 2017 refinancing, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds 6.50:1.00 for two consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below 6.50:1.00 for two consecutive fiscal quarters, such pledges and additional guarantees may be released.
Term Loans
On January 10, 2017, the Company refinanced its $300,000 unsecured term loan (the “First Term Loan”) that matures on January 10, 2022. The First Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $500,000. The First Term Loan bears interest at variable rates.
On January 10, 2017, the Company amended and restated its $555,000 unsecured term loan (the “Second Term Loan”) that matures on January 29, 2021. The Second Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $700,000. The Second Term Loan bears interest at variable rates.
The Company has entered into interest rate swap agreements to effectively fix the LIBOR rates for the term loans (see “Derivative and Hedging Activities” below).
The Company’s term loans contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.
The Company and certain of its subsidiaries guarantee the obligations under the Company’s term loans. While the term loans do not initially include any pledges of equity interests in the Company’s subsidiaries, in connection with the January 10, 2017 refinancing, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds 6.50:1.00 for two consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below 6.50:1.00 for two consecutive fiscal quarters, such pledges and additional guarantees may be released.
Derivative and Hedging Activities
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) (“OCI”). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) (“AOCI”) related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company’s variable rate debt. Effective August 2, 2012, the Company entered into five interest rate swap agreements with an aggregate notional amount of $300,000 to hedge the variable interest rate on the First Term Loan through August 2, 2017, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was 2.23% at June 30, 2017. As of June 30, 2017, the Company has interest rate swaps with an aggregate notional amount of $555,000 to hedge the variable interest rate on the Second Term Loan and, as a result, the fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements) is 2.95% through May 16, 2019. From May 16, 2019 through the term of the Second Term Loan, the Company has interest rate swaps with an aggregate notional amount of $377,500 to hedge a portion of the variable interest rate debt on the Second Term Loan. The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. The interest rate swaps were entered into with the intention of eliminating the variability of the terms loans, but can also limit the exposure to any amendments, supplements, replacements or refinancings of the Company’s debt.

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The following tables present the effect of derivative instruments on the Company’s accompanying consolidated statements of operations and comprehensive income, including the location and amount of unrealized loss on outstanding derivative instruments in cash flow hedging relationships, for the three and six months ended June 30, 2017 and 2016:
 
 
Amount of Loss Recognized in OCI on Derivative Instruments
 
Location of Loss Reclassified from AOCI into Net Income
 
Amount of Loss Reclassified from AOCI into Net Income
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the three months ended
 
 
 
 
For the three months ended
 
 
June 30,
 
 
 
 
June 30,
 
 
2017
 
2016
 
 
 
 
2017
 
2016
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(1,675
)
 
$
(5,971
)
 
Interest expense
 
$
498

 
$
1,730

 
 
Amount of Loss Recognized in OCI on Derivative Instruments
 
Location of Loss Reclassified from AOCI into Net Income
 
Amount of Loss Reclassified from AOCI into Net Income
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the six months ended
 
 
 
 
For the six months ended
 
 
June 30,
 
 
 
 
June 30,
 
 
2017
 
2016
 
 
 
 
2017
 
2016
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(551
)
 
$
(20,223
)
 
Interest expense
 
$
1,483

 
$
3,510

During the six months ended June 30, 2017 and 2016, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
As of June 30, 2017, there was $3,300 in cumulative unrealized gain of which $3,296 was included in AOCI and $4 was attributable to noncontrolling interests. As of December 31, 2016, there was $2,368 in cumulative unrealized gain of which $2,365 was included in AOCI and $3 was attributable to noncontrolling interests. The Company expects that approximately $907 will be reclassified from AOCI and noncontrolling interests and recognized as a reduction to income in the next 12 months, calculated as estimated interest expense using the interest rates on the derivative instruments as of June 30, 2017.
Extinguishment of Debt
As discussed above, on January 10, 2017, the Company refinanced its senior unsecured credit facility and First Term Loan and LHL refinanced its unsecured revolving credit facility. The refinancing arrangements for the senior unsecured credit facility and First Term Loan were considered substantial modifications. The Company recognized a loss from extinguishment of debt of zero and $1,706, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017, respectively. The loss from extinguishment of debt represents a portion of the unamortized debt issuance costs incurred for the senior unsecured credit facility when the original agreement was executed and the debt issuance costs incurred in connection with the refinancing of the First Term Loan.
Mortgage Loan
The Company’s mortgage loan is secured by the property. The mortgage is non-recourse to the Company except for fraud or misapplication of funds.
The Company’s mortgage loan contains debt service coverage ratio tests related to the mortgaged property. If the debt service coverage ratio for the property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender (“cash trap”) until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.

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Financial Covenants
Failure of the Company to comply with financial and other covenants contained in its credit facilities, term loans and non-recourse secured mortgage could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates financial and other covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.
A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of June 30, 2017, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable and mortgage loan.
5.
Commitments and Contingencies
Ground, Land and Building, and Air Rights Leases
A summary of the Company’s hotels subject to non-cancelable operating leases as of June 30, 2017 is as follows:
Lease Properties
 
Lease Type
 
Lease Expiration Date
Southernmost Beach Resort Key West (Restaurant facility)
 
Ground lease
 
April 2019 (1)
Hyatt Regency Boston Harbor
 
Ground lease
 
March 2026 (2)
The Hilton San Diego Resort and Spa
 
Ground lease
 
December 2045
San Diego Paradise Point Resort and Spa
 
Ground lease
 
May 2050
Hotel Vitale
 
Ground lease
 
March 2056 (3)
Viceroy Santa Monica
 
Ground lease
 
September 2065
Westin Copley Place (4)
 
Air rights lease
 
December 2077
The Liberty Hotel
 
Ground lease
 
May 2080
Hotel Solamar
 
Ground lease
 
December 2102
(1) The Company can begin negotiating a renewal one year in advance of the lease expiration date.
(2) The Company has options, subject to certain terms and conditions, to extend the ground lease for 51 years to 2077.
(3) The Company has the option, subject to certain terms and conditions, to extend the ground lease for 14 years to 2070.
(4) No payments are required through maturity.
The ground leases at Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale are subject to minimum annual rent increases, resulting in noncash straight-line rent expense of $460 and $925 for the three and six months ended June 30, 2017, respectively, and $471 and $948 for the three and six months ended June 30, 2016, respectively, which is included in total ground rent expense. Total ground rent expense for the three and six months ended June 30, 2017 was $3,823 and $7,208, respectively. Total ground rent expense for the three and six months ended June 30, 2016 was $4,108 and $7,921, respectively. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds.

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A summary of the Company’s hotels subject to capital leases of land and building as of June 30, 2017 is as follows:
Lease Properties
 
Estimated Present Value of Remaining Rent Payments (1)
 
Lease Expiration Date
The Roger
 
$
4,892

 
December 2044
Harbor Court Hotel
 
$
18,424

 
April 2048
(1) At acquisition, the estimated present value of the remaining rent payments were recorded as capital lease obligations. These obligations, net of amortization, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Actual base and participating ground rent payments related to The Roger and Harbor Court Hotel were $100 and $298 for the three months ended June 30, 2017, respectively, and $199 and $586 for the six months ended June 30, 2017, respectively. Actual base and participating ground rent payments related to The Roger and Harbor Court Hotel were $100 and $337 for the three months ended June 30, 2016, respectively, and $199 and $670 for the six months ended June 30, 2016, respectively.
As of June 30, 2017, future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:
2017
$
5,669

2018
11,443

2019
11,389

2020
11,730

2021
11,850

Thereafter
487,362

 
$
539,443

Reserve Funds for Future Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% of hotel revenues, sufficient to cover the cost of (i) certain non-routine repairs and maintenance to the hotels and (ii) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of June 30, 2017, $11,330 was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
Restricted Cash Reserves
At June 30, 2017, the Company held $13,166 in restricted cash reserves. Included in such amounts are $11,330 of reserve funds for future capital expenditures and $1,836 held by insurance and management companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
6.
Equity
Common Shares of Beneficial Interest
On January 1, 2017, the Company issued 16,010 common shares of beneficial interest and authorized an additional 9,103 deferred shares to the independent members of its Board of Trustees for their 2016 compensation. These common shares of beneficial interest were issued under the 2014 Plan.

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On January 31, 2017, the Company issued 27,767 common shares of beneficial interest related to the resignation of a former member of its Board of Trustees for his accumulated deferred shares granted as compensation for 2001 through 2016. These common shares of beneficial interest were issued under the 2009 Plan and 2014 Plan.
On March 2, 2017, the Company issued 38,599 common shares of beneficial interest to executives related to the nonvested share awards with either market or performance conditions granted on March 20, 2014 (see Note 7 for additional details, including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.
On March 23, 2017, the Company issued 122,816 nonvested shares with service conditions to the Company’s executives and employees. The nonvested shares will vest in three annual installments starting January 1, 2018, subject to continued employment. These common shares of beneficial interest were issued under the 2014 Plan.
Common Dividends
The Company paid the following dividends on common shares/units during the six months ended June 30, 2017:
Dividend per
Share/Unit
 
 
For the Quarter Ended
 
Record Date
 
Date Paid
$
0.45

 
December 31, 2016
 
December 30, 2016
 
January 17, 2017
$
0.45

 
March 31, 2017
 
March 31, 2017
 
April 17, 2017
Treasury Shares
Treasury shares are accounted for under the cost method. During the six months ended June 30, 2017, the Company received 102,651 common shares of beneficial interest related to employees surrendering shares to pay minimum withholding taxes on the vesting date.
The Company’s Board of Trustees has authorized an expanded share repurchase program (the “Repurchase Program”) to acquire up to $600,000 of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of June 30, 2017, the Company has availability under the Repurchase Program to acquire up to $569,807 of common shares of beneficial interest. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The Repurchase Program may be suspended, modified or terminated at any time for any reason without prior notice. The Repurchase Program does not obligate the Company to acquire any specific number of shares, and all open market repurchases will be made in accordance with applicable rules and regulations setting forth certain restrictions on the method, timing, price and volume of open market share repurchases.
During the six months ended June 30, 2017, the Company re-issued 16,010 treasury shares related to earned 2016 compensation for the Board of Trustees, 27,767 treasury shares related to the resignation of a former member of the Board of Trustees for his accumulated deferred shares granted as compensation for 2001 through 2016, 38,001 treasury shares related to the earned share awards with market or performance conditions and 21,965 treasury shares related to the grants of nonvested shares with service conditions.
At June 30, 2017, there were 26,276 common shares of beneficial interest in treasury.
Preferred Shares
The following preferred shares of beneficial interest were outstanding as of June 30, 2017:
Security Type                                             
 
Number of
Shares
6.375% Series I Preferred Shares
 
4,400,000

6.3% Series J Preferred Shares
 
6,000,000

On May 4, 2017, the Company redeemed all of the outstanding Series H Preferred Shares for $68,750 ($25.00 per share) plus $272 of accrued and unpaid dividends through the redemption date. The redemption value of the Series H Preferred Shares exceeded their carrying value by $2,401, which is included in the determination of net income attributable to common shareholders for the three and six months ended June 30, 2017. The $2,401 represents the offering costs related to the redeemed Series H Preferred Shares.
The 6.375% Series I Cumulative Redeemable Preferred Shares (the “Series I Preferred Shares”) and the 6.3% Series J Cumulative Redeemable Preferred Shares (the “Series J Preferred Shares”) (collectively, the “Preferred Shares”) rank senior to

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the common shares of beneficial interest and on parity with each other with respect to payment of distributions. The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for all past dividend periods. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares.
The Company may not optionally redeem the Series I Preferred Shares and the Series J Preferred Shares prior to March 4, 2018 and May 25, 2021, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After those dates, the Company may, at its option, redeem the Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions. In addition, upon the occurrence of a change of control (as defined in the Company’s declaration of trust), the result of which the Company’s common shares of beneficial interest and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT LLC or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days after the change of control occurred, by paying $25.00 per share, plus any accrued and unpaid distributions. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of Series I Preferred Shares and Series J Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares of beneficial interest based on a defined formula subject to a cap of 8,835,200 common shares and 12,842,400 common shares, respectively.
Preferred Dividends
The Company paid the following dividends on preferred shares during the six months ended June 30, 2017:
Security Type        
 
Dividend per Share (1)
 
For the Quarter Ended
 
Record Date
 
Date Paid
7.5% Series H
 
$
0.47

 
December 31, 2016
 
December 30, 2016
 
January 17, 2017
6.375% Series I
 
$
0.40

 
December 31, 2016
 
December 30, 2016
 
January 17, 2017
6.3% Series J
 
$
0.39

 
December 31, 2016
 
December 30, 2016
 
January 17, 2017
7.5% Series H
 
$
0.47

 
March 31, 2017
 
March 31, 2017
 
April 17, 2017
6.375% Series I
 
$
0.40

 
March 31, 2017
 
March 31, 2017
 
April 17, 2017
6.3% Series J
 
$
0.39

 
March 31, 2017
 
March 31, 2017
 
April 17, 2017
(1) Amounts are rounded to the nearest whole cent for presentation purposes.

In addition, the final dividend payment of $0.10 per Series H Preferred Share for the period April 15, 2017 through the redemption date of May 4, 2017 was included in the redemption price.
Noncontrolling Interests of Common Units in Operating Partnership
As of June 30, 2017, the Operating Partnership had 145,223 common units of limited partnership interest outstanding, representing a 0.1% partnership interest, held by the limited partners. As of June 30, 2017, approximately $4,328 of cash or the equivalent value in common shares, at the Company’s option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of $4,328 is based on the Company’s closing common share price of $29.80 on June 30, 2017, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. Subject to certain limitations, the outstanding common units of limited partnership interest are redeemable for cash, or at the Company’s option, for a like number of common shares of beneficial interest of the Company.
7.
Equity Incentive Plan
The 2014 Plan permits the Company to issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2014 Plan provides for a maximum of 2,900,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted or unrestricted share awards, phantom shares, performance awards, incentive awards, other share-based awards, or any combination of the foregoing. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2014 Plan during any fiscal year to any one individual is limited to 500,000 shares. The 2014 Plan terminates on February 17, 2024. The 2014 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than

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100% of the fair value of the common shares on the date of grant. Restricted share awards and options under the 2014 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a three year period. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. At June 30, 2017, there were 2,514,675 common shares available for future grant under the 2014 Plan. The 2014 Plan replaced the 2009 Plan. The Company will no longer make any grants under the 2009 Plan (although awards previously made under the 2009 Plan that are outstanding will remain in effect in accordance with the terms of that plan and the applicable award agreements).
Nonvested Share Awards with Service Conditions
From time to time, the Company awards nonvested shares under the 2014 Plan to executives, employees and members of the Board of Trustees. The nonvested shares issued to executives and employees generally vest over three years based on continued employment. The shares issued to the members of the Board of Trustees vest immediately upon issuance. The Company determines the grant date fair value of the nonvested shares based upon the closing price of its common shares on the New York Stock Exchange on the date of grant and number of shares per the award agreements. Compensation costs are recognized on a straight-line basis over the requisite service period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
A summary of the Company’s nonvested share awards with service conditions as of June 30, 2017 is as follows:
 
Number of
Shares
 
Weighted -
Average Grant
Date Fair Value
Nonvested at January 1, 2017
236,759

 
$
30.78

Granted
125,407

 
29.03

Vested
(146,587
)
 
30.99

Forfeited
0

 
0.00

Nonvested at June 30, 2017
215,579

 
$
29.13

As of June 30, 2017 and December 31, 2016, there were $4,618 and $2,798, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of June 30, 2017 and December 31, 2016, these costs were expected to be recognized over a weighted-average period of 1.5 years and 1.2 years, respectively. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three and six months ended June 30, 2017 was $1,736 and $4,417, respectively, and during the three and six months ended June 30, 2016 was $534 and $2,256, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with service conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $835 and $1,683 for the three and six months ended June 30, 2017, respectively, and $814 and $1,589 for the three and six months ended June 30, 2016, respectively.
On April 9, 2016, the Company finalized the former Chief Financial Officer’s severance package and the termination date was set to be no later than April 29, 2016. Pursuant to the terms of the award agreements, all of his nonvested share awards with service conditions would vest upon termination. Accordingly, the Company accelerated the recognition of previously unrecognized compensation costs related to his nonvested share awards with service conditions over the estimated remaining service period. On May 6, 2016, all of his nonvested share awards with service conditions vested with all remaining previously unrecognized compensation costs recognized. The compensation cost (net of forfeitures) that has been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income was $538 for the three and six months ended June 30, 2016.
Nonvested Share Awards with Market or Performance Conditions
On January 26, 2012, the Company’s Board of Trustees granted a target of 79,823 nonvested share awards with market conditions to executives (the “January 26, 2012 Awards”). On January 1, 2015, the executives earned 136.3% of their 79,823 target number of shares, or 108,779 shares. Of the shares earned, 36,261 and 36,260 shares vested on January 1, 2015 and January 1, 2016, respectively. On May 6, 2016, upon his termination, all of the former Chief Financial Officer’s 6,882 earned shares vested immediately. The remaining 29,376 earned shares vested on January 4, 2017. The executives received a cash payment of $334 on the earned shares equal to the value of all dividends paid on common shares from January 1, 2012 until the determination date, January 1, 2015. As of January 1, 2015, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares.

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On March 20, 2014, the Company’s Board of Trustees granted a target of 57,385 nonvested share awards, exclusive of the 14,582 shares granted to the former Chief Financial Officer, with either market or performance conditions to executives (the “March 20, 2014 Awards”). On February 24, 2017, the executives earned 134.5% of their 28,692 target number of shares, or 38,599 shares, and all of the earned shares vested immediately. The executives also received a cash payment of $190 on the shares equal to the value of all dividends paid on common shares from January 1, 2014 until the determination date, February 24, 2017. As of February 25, 2017, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares. The actual amounts of the shares awarded with respect to the remaining 28,693 of the 57,385 shares will be determined on or about July 1, 2017, based on the performance measurement period of July 1, 2014 through June 30, 2017, in accordance with the terms of the award agreements. The actual amounts of the shares awarded will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the award agreements, and none of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the performance measurement period, all of the earned shares will be issued and outstanding on the date. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the determination date. Such amounts will be paid to the awardees on or about July 1, 2017. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to 28,692 shares, amortization commenced on March 20, 2014, the beginning of the requisite service period, and, with respect to 28,693 shares, amortization commenced on July 1, 2014, the beginning of the requisite service period.
On March 23, 2017, the Company’s Board of Trustees granted a target of 124,526 nonvested share awards with either market or performance conditions to executives (the “March 23, 2017 Awards”). The actual amounts of the shares awarded with respect to 62,264 of the 124,526 shares will be determined on or about January 1, 2020, based on the performance measurement period of January 1, 2017 through December 31, 2019, in accordance with the terms of the agreements. The actual amounts of the shares awarded with respect to the remaining 62,262 of the 124,526 shares will be determined on or about July 1, 2020, based on the performance measurement period of July 1, 2017 through June 30, 2020, in accordance with the terms of the agreements. The actual amounts of the shares awarded will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the agreements, and none of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardees on or about January 1, 2020 and July 1, 2020, respectively. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to 62,264 shares, amortization commenced on March 23, 2017, the beginning of the requisite service period, and, with respect to 62,262 shares, amortization will commence on July 1, 2017, the beginning of the requisite service period.
The terms stipulated in the March 23, 2017 Awards used to determine the total amount of the shares consist of the following three tranches: (1) a comparison of the Company’s total return to the total returns’ of up to seven companies in a designated peer group of the Company, (2) the Company’s actual total return as compared to a Board-established total return goal and (3) a comparison of the Company’s return on invested capital to the return on invested capital of up to seven companies in a designated peer group of the Company.
The tranches described in (1) and (2) are nonvested share awards with market conditions. For the March 23, 2017 Awards, the grant date fair value of the awards with market conditions were estimated by the Company using historical data under the Monte Carlo valuation method provided by a third party consultant. The final values were determined during the second quarter of 2017 with an insignificant cumulative adjustment to compensation cost recorded. The third tranche is based on “return on invested capital” discussed below, which is a performance condition. The grant date fair values of the tranches with performance conditions were calculated based on the targeted awards, and the valuation is adjusted on a periodic basis.
The capital market assumptions used in the valuations consisted of the following:
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the awards including total share return volatility and risk-free interest.
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
The valuation has been performed in a risk-neutral framework.
Return on invested capital is a performance condition award measurement. The estimated value was calculated based on the initial face value at the date of grant. The valuation will be adjusted on a periodic basis as the estimated number of awards expected to vest is revised.

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The assumptions used were as follows for each performance measure:
 
Volatility
 
Interest
Rates
 
Dividend
Yield
 
Stock
Beta
 
Fair Value of
Components
of Award
 
Weighting
of Total
Awards
March 23, 2017 Awards (performance period starting January 1, 2017)
 
 
 
 
Target amounts
27.30
%
 
1.52
%
 
N/A
 
N/A

 
$
21.13

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
29.03

 
33.30
%
Peer companies
27.30
%
 
1.52
%
 
N/A
 
0.987

 
$
31.12

 
33.30
%
March 23, 2017 Awards (performance period starting July 1, 2017)
 
 
 
 
Target amounts
27.30
%
 
1.52
%
 
N/A
 
N/A

 
$
25.34

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
29.03

 
33.30
%
Peer companies
27.30
%
 
1.52
%
 
N/A
 
0.987

 
$
30.82

 
33.30
%
A summary of the Company’s nonvested share awards with either market or performance conditions as of June 30, 2017 is as follows:
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
Nonvested at January 1, 2017
276,183

 
$
27.36

Granted (1)
134,433

 
28.03

Vested
(67,975
)
 
33.32

Forfeited
0

 
0.00

Nonvested at June 30, 2017
342,641

 
$
28.80

(1) 
Amount includes an additional 9,907 shares issued on February 24, 2017 from the March 20, 2014 grant, which were earned in excess of the target amount.
As of June 30, 2017 and December 31, 2016, there were $6,015 and $3,757, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of June 30, 2017 and December 31, 2016, these costs were expected to be recognized over a weighted-average period of 2.3 years and 1.8 years, respectively. As of June 30, 2017 and December 31, 2016, there were 531,507 and 463,532 share awards with market or performance conditions vested, respectively. Additionally, there were zero and 29,376 nonvested share awards with market or performance conditions earned but nonvested due to a service condition as of June 30, 2017 and December 31, 2016, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with market or performance conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $980 and $1,840 for the three and six months ended June 30, 2017, respectively, and $998 and $2,036 for the three and six months ended June 30, 2016, respectively.
On April 9, 2016, the Company finalized the former Chief Financial Officer’s severance package and the termination date was set to be no later than April 29, 2016. Pursuant to the terms of the award agreements, a portion of his nonvested share awards with market or performance conditions would vest upon termination. Accordingly, the Company accelerated the recognition of previously unrecognized compensation costs on his nonvested share awards with market or performance conditions over the estimated remaining service period. On May 6, 2016 and May 9, 2016, a portion of his nonvested share awards with market or performance conditions vested, a portion was forfeited and additional shares were earned for awards valued at over 100% of the target, with all remaining previously unrecognized compensation costs recognized. The compensation cost (net of forfeitures) related to his nonvested share awards with market or performance conditions that has been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income was $96 for the three and six months ended June 30, 2016.
For the three and six months ended June 30, 2016, severance expense related to the former Chief Financial Officer’s termination totaled $1,576 and included cash compensation and benefits, compensation for shares with service conditions and shares with market or performance conditions and cash payments related to dividends on restricted shares that vested.

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8.
LHL
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.
Other indirect hotel operating expenses consist of the following expenses incurred by the hotels:
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
General and administrative
$
24,969

 
$
27,041

 
$
49,560

 
$
51,642

Sales and marketing
17,623

 
19,908

 
35,567

 
38,489

Repairs and maintenance
9,200

 
9,911

 
18,958

 
19,747

Management and incentive fees
10,943

 
10,926

 
18,169

 
18,557

Utilities and insurance
7,262

 
8,296

 
15,105

 
16,529

Franchise fees
2,501

 
3,245

 
4,338

 
5,522

Other expenses
679

 
956

 
1,136

 
1,712

Total other indirect expenses
$
73,177

 
$
80,283

 
$
142,833

 
$
152,198


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As of June 30, 2017, LHL leased all 41 hotels owned by the Company as follows:
 
 
Hotel Properties
 
Location
1.
 
Hotel Amarano Burbank
 
Burbank, CA
2.
 
L’Auberge Del Mar
 
Del Mar, CA
3.
 
Hilton San Diego Gaslamp Quarter
 
San Diego, CA
4.
 
Hotel Solamar
 
San Diego, CA
5.
 
San Diego Paradise Point Resort and Spa
 
San Diego, CA
6.
 
The Hilton San Diego Resort and Spa
 
San Diego, CA
7.
 
Harbor Court Hotel
 
San Francisco, CA
8.
 
Hotel Vitale
 
San Francisco, CA
9.
 
Park Central San Francisco
 
San Francisco, CA
10.
 
Serrano Hotel
 
San Francisco, CA
11.
 
The Marker San Francisco
 
San Francisco, CA
12.
 
Villa Florence
 
San Francisco, CA
13.
 
Chaminade Resort and Conference Center
 
Santa Cruz, CA
14.
 
Viceroy Santa Monica
 
Santa Monica, CA
15.
 
Chamberlain West Hollywood
 
West Hollywood, CA
16.
 
Le Montrose Suite Hotel
 
West Hollywood, CA
17.
 
Le Parc Suite Hotel
 
West Hollywood, CA
18.
 
The Grafton on Sunset
 
West Hollywood, CA
19.
 
Hotel George
 
Washington, DC
20.
 
Hotel Madera
 
Washington, DC
21.
 
Hotel Palomar, Washington, DC
 
Washington, DC
22.
 
Hotel Rouge
 
Washington, DC
23.
 
Mason & Rook Hotel
 
Washington, DC
24.
 
Sofitel Washington, DC Lafayette Square
 
Washington, DC
25.
 
The Donovan
 
Washington, DC
26.
 
The Liaison Capitol Hill
 
Washington, DC
27.
 
Topaz Hotel
 
Washington, DC
28.
 
Southernmost Beach Resort Key West
 
Key West, FL
29.
 
The Marker Waterfront Resort
 
Key West, FL
30.
 
Hotel Chicago
 
Chicago, IL
31.
 
Westin Michigan Avenue
 
Chicago, IL
32.
 
Hyatt Regency Boston Harbor
 
Boston, MA
33.
 
Onyx Hotel
 
Boston, MA
34.
 
The Liberty Hotel
 
Boston, MA
35.
 
Westin Copley Place
 
Boston, MA
36.
 
Gild Hall
 
New York, NY
37.
 
The Roger
 
New York, NY
38.
 
Park Central Hotel New York (shared lease with WestHouse Hotel New York)
 
New York, NY
39.
 
WestHouse Hotel New York
 
New York, NY
40.
 
The Heathman Hotel
 
Portland, OR
41.
 
Embassy Suites Philadelphia - Center City
 
Philadelphia, PA

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9.
Income Taxes
Income tax expense was comprised of the following for the three and six months ended June 30, 2017 and 2016:
<
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
LHL’s income tax expense (benefit)
$
4,939

 
$
7,246

 
$
(132
)
 
$
1,373

Operating Partnership’s income tax expense
64

 
364

 
362

 
617

Total income tax expense
$
5,003

 
$
7,610