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Hotel Management Agreements and Leases | 3 Months Ended
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Mar. 31, 2017
Leases [Abstract] |
Hotel Management Agreements and Leases | Hotel Management Agreements and Leases As of March 31, 2017, we owned 308 hotels and 198 travel centers, which are included in 14 operating agreements. We do not operate any of our properties. As of March 31, 2017, 305 of our hotels are leased to our TRSs and managed by independent hotel operating companies and three hotels are leased to third parties. As of March 31, 2017, our hotel properties are managed by or leased to separate subsidiaries of Marriott International, Inc., or Marriott, InterContinental, Sonesta, Wyndham Hotel Group, or Wyndham, Hyatt Hotels Corporation, or Hyatt, Carlson Hotels Worldwide, or Carlson, and Morgans, under nine agreements. These hotel agreements have initial terms expiring between 2019 and 2103. Each of these agreements is for between one and 96 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties, and the renewal terms range between 20 to 60 years. Most of these agreements require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels, or FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flows after payment of operating expenses, funding of the FF&E reserves, payment of our minimum returns, payment of certain management fees and replenishment of security deposits or guarantees. Some of our managers or tenants or their affiliates have provided deposits or guarantees to secure their obligations to pay us. Marriott No. 1 agreement. Our management agreement with Marriott for 53 hotels, or our Marriott No. 1 agreement, provides that as of March 31, 2017 we are to be paid an annual minimum return of $68,835 to the extent that gross revenues of the hotels, after payment of hotel operating expenses and funding of the FF&E reserve, are sufficient to do so. We do not have any security deposits or guarantees for our minimum returns from the 53 hotels included in our Marriott No. 1 agreement. Accordingly, the minimum returns we receive from these hotels managed by Marriott are limited to available hotel cash flows after payment of operating expenses and funding of the FF&E reserve. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. We realized minimum returns of $17,188 and $17,093 during the three months ended March 31, 2017 and 2016, respectively, under this agreement. We also realized additional returns of $839 during the three months ended March 31, 2016, which represents our share of hotel cash flows in excess of the minimum returns due to us for the period. We did not realize any additional returns during the three months ended March 31, 2017. We funded $1,990 for capital improvements at certain of the hotels included in our Marriott No. 1 agreement during the three months ended March 31, 2017. We currently expect to fund $2,110 for capital improvements under our Marriott No. 1 agreement during the remainder of 2017. As we fund these improvements, the annual minimum returns payable to us increase by 10% of the amounts funded. Marriott No. 234 agreement. Our management agreement with Marriott for 68 hotels, or our Marriott No. 234 agreement, provides that as of March 31, 2017 we are to be paid an annual minimum return of $106,360. We realized minimum returns of $26,590 and $26,560 during the three months ended March 31, 2017 and 2016, respectively, under this agreement. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a security deposit to cover minimum return payment shortfalls, if any. Under this agreement, this security deposit may be replenished and increased up to $64,700 from a share of hotel cash flows in excess of the minimum returns due to us. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. During the three months ended March 31, 2017, our available security deposit was replenished by $267 from a share of hotel cash flows in excess of the minimum returns due to us for the period. The available balance of this deposit was $16,747 as of March 31, 2017. Pursuant to our Marriott No. 234 agreement, Marriott has also provided us with a limited guarantee which expires in 2019 for shortfalls up to 90% of our minimum returns, if and after the available security deposit has been depleted. Marriott was not required to make any guarantee payments to us during the three months ended March 31, 2017 because the hotels generated net operating results in excess of the guarantee threshold amount (90% of the minimum returns due to us). The available balance of the guarantee was $30,672 as of March 31, 2017. Marriott No. 5 agreement. We lease one hotel in Kauai, HI to Marriott. This lease is guaranteed by Marriott and we realized $2,540 and $2,529 of rent for this hotel during the three months ended March 31, 2017 and 2016, respectively. The guarantee provided by Marriott with respect to this leased hotel is unlimited. Marriott has four renewal options for 15 years each. On August 31, 2016, Marriott notified us that it will not exercise its renewal option at the expiration of the current lease term ending on December 31, 2019. InterContinental agreement. Our management agreement with InterContinental for 96 hotels, or our InterContinental agreement, provides that, as of March 31, 2017, we are to be paid annual minimum returns and rents of $174,393. We realized minimum returns and rents of $41,608 and $38,203 during the three months ended March 31, 2017 and 2016, respectively, under this agreement. We also realized additional returns under this agreement of $311 and $329 during the three months ended March 31, 2017 and 2016, respectively, from our share of hotel cash flows in excess of our minimum returns and rents due to us for those periods. Pursuant to our InterContinental agreement, InterContinental has provided us with a security deposit to cover minimum payment shortfalls, if any. Under this agreement, InterContinental is required to maintain a minimum security deposit of $37,000 and this security deposit may be replenished and increased up to $100,000 from a share of future cash flows from the hotels in excess of our minimum returns and rents. During the three months ended March 31, 2017, $1,574 of the available security deposit was utilized to cover shortfalls of hotels’ cash flows from the minimum payments due to us for the period. During the three months ended March 31, 2017, we amended our InterContinental agreement in connection with each of the two hotel acquisitions we made during that period. See Note 7 for further information regarding these acquisitions. As a result of the amendments, the annual minimum returns and rents due to us increased and InterContinental provided us an aggregate of $12,604 to supplement the existing security deposit. The available balance of the InterContinental security deposit was $83,777 as of March 31, 2017. We did not make any fundings for capital improvements to our InterContinental hotels during the three months ended March 31, 2017. We currently expect to fund $6,243 for capital improvements under our InterContinental agreement during the remainder of 2017. As we fund these improvements, the annual minimum returns and rents payable to us increase by 8% of the amounts funded. Sonesta agreement. As of March 31, 2017, Sonesta managed nine of our full service hotels and 25 of our limited service hotels pursuant to management agreements for each of the hotels, which we refer to collectively as our Sonesta agreement, and a pooling agreement, which combines those management agreements for purposes of calculating gross revenues, payment of hotel operating expenses, payment of fees and distributions and minimum returns due to us. Our Sonesta agreement provides that we are paid a fixed annual minimum return equal to 8% of our invested capital, as defined therein, which was $90,227 as of March 31, 2017, if gross revenues of the hotels, after payment of hotel operating expenses and management and related fees (other than Sonesta's incentive fee, if applicable), are sufficient to do so. Our Sonesta agreement further provides that we are paid an additional return based upon operating profits, as defined therein, after payment of Sonesta's incentive fee, if applicable. We do not have any security deposits or guarantees for our hotels managed by Sonesta. Accordingly, the returns we receive from our hotels managed by Sonesta are limited to available hotel cash flows after payment of operating expenses. We realized returns of $10,662 and $8,766 during the three months ended March 31, 2017 and 2016, respectively, under our Sonesta agreement. Pursuant to our Sonesta agreement, we paid Sonesta management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third party reservation transmission fees aggregating $5,729 and $5,300 for the three months ended March 31, 2017 and 2016, respectively. In addition, we paid Sonesta procurement and construction supervision fees of $81 and $343 for the three months ended March 31, 2017 and 2016, respectively. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements. Our Sonesta agreement does not require FF&E escrow deposits, but does require us to fund capital expenditures that we approve at our hotels managed by Sonesta. We funded $3,531 for renovations and other capital improvements to hotels included in our Sonesta agreement during the three months ended March 31, 2017. We currently expect to fund $17,409 for renovations and other capital improvements during the remainder of 2017, and $18,708 during 2018. If and as we acquire the hotel that we expect to add to our Sonesta Agreement as described in Note 7 above, we expect to fund additional renovations at this hotel during 2017 and 2018, but the amount and timing of this additional renovation funding have not yet been determined. The annual minimum returns due to us under the Sonesta agreement increase by 8% of the amounts funded in excess of threshold amounts, as defined therein. We owed Sonesta $783 and $5,484 for capital expenditure and other reimbursements at March 31, 2017 and 2016, respectively. Amounts due to Sonesta are included in due to related persons in our condensed consolidated balance sheets. See Note 10 for further information regarding our relationship with Sonesta and Note 7 for further information regarding the effects of certain of our property acquisitions on our agreements with Sonesta. Wyndham agreements. Our management agreement with Wyndham for 22 hotels, or our Wyndham agreement, provides that as of March 31, 2017, we are to be paid annual minimum returns of $27,342. We realized returns of $6,801 and $6,654 during the three months ended March 31, 2017 and 2016, respectively, under this agreement. Pursuant to our Wyndham agreement, Wyndham has provided us with a guarantee, which is limited to $35,656, subject to an annual payment limit of $17,828, and expires on July 28, 2020. As of December 31, 2016, $1,090 remained available to cover payment shortfalls of our minimum returns due under the management agreement. During the three months ended March 31, 2017, the hotels under this agreement generated cash flows that were less than the minimum returns due to us and the remaining guarantee was depleted. This guarantee may be replenished from future cash flows from these hotels in excess of our minimum returns. As of May 9, 2017, Wyndham has paid all of the minimum returns due to us under our Wyndham agreement. We also lease 48 vacation units in one of our hotels to Wyndham Vacation Resorts, Inc., a subsidiary of Wyndham, or Wyndham Vacation, which requires that we are paid annual minimum rents of $1,407. The guarantee provided by Wyndham with respect to the Wyndham Vacation lease for part of one hotel is unlimited. We recognized rents of $454 during both the three months ended March 31, 2017 and 2016 under our Wyndham Vacation lease agreement. Rental income for the three months ended March 31, 2017 and 2016 for this lease includes $102 and $112, respectively, of adjustments necessary to record rent on a straight line basis. Our Wyndham agreement requires FF&E escrow deposits equal to 5% of total hotel sales for all hotels included in the agreement subject to available cash flows after payment of our minimum return. No FF&E escrow deposits were made during the three months ended March 31, 2017 due to insufficient available cash flows generated at these hotels. We funded $4,313 for capital improvements to certain hotels included in our Wyndham agreement during the three months ended March 31, 2017. We currently expect to fund $6,787 for capital improvements under this agreement during the remainder of 2017. As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded. Morgans agreement. We lease The Clift Hotel in San Francisco, CA to a subsidiary of Morgans. This lease is scheduled to expire in 2103 and requires annual rent to us of $7,595, which amount is scheduled to increase on October 14, 2019 and every five years thereafter based upon consumer price index increases of no less than 10% and no more than 20% at the time of each increase. Although the terms of this lease might have qualified this lease as a direct financing lease under GAAP, we recognize the rental income we receive from Morgans on a cash basis because of uncertainty regarding our collection of future rent increases. In December 2016, we notified Morgans that the closing of its merger with SBE Entertainment Group LLC, or SBE, without our consent was a breach of its lease obligations and shortly thereafter we commenced an unlawful detainer action in the California state courts to compel Morgans and SBE to surrender possession of this hotel to us. We are currently pursuing this litigation and simultaneously engaging in discussions with Morgans and SBE regarding this hotel. The outcome of this pending litigation and our discussions with Morgans and SBE is not assured, but we believe Morgans may surrender to us possession of this hotel or that the court will determine that Morgans and SBE have breached the lease. We also believe that this hotel may require substantial capital investment to remain competitive in its market. The continuation of our dispute with Morgans and SBE is causing us to incur legal fees. Despite the continuation of this dispute, Morgans has paid the rents due to us through May 9, 2017; however we believe that we may suffer some loss of future rent from this hotel, at least until this hotel is renovated and operations improve. TA leases. As of March 31, 2017, we leased to TA a total of 198 travel centers under five leases. We recognized rental income from TA of $68,581 and $68,117 for the three months ended March 31, 2017 and 2016, respectively. Rental income for the three months ended March 31, 2017 and 2016 includes $2,912 and $3,644, respectively, of adjustments necessary to record the deferred rent obligations under our TA leases and the estimated future payments to us by TA for the cost of removing underground storage tanks on a straight line basis. As of March 31, 2017 and December 31, 2016, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $68,920 and $65,332, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets. In addition, as of March 31, 2017, TA owed us deferred rent of $150,000, which is due and payable on various dates from 2024 through 2032. Our TA leases do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non-structural components. Under our TA leases, TA may request that we fund capital improvements in return for increases in TA’s annual minimum rent. We funded $24,908 for the three months ended March 31, 2017 of qualifying capital improvements to our TA leases. As a result, TA’s annual minimum rent payable to us increased by $2,117. We currently expect to fund $53,769 for renovations and other capital improvements to our travel centers during the remainder of 2017. TA is not obligated to request and we are not obligated to fund any such improvements. In addition to the rental income we recognized from TA during the three months ended March 31, 2017 and 2016 as described above, our TA leases require TA to pay us percentage rent based upon increases in certain sales. We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $604 and $250 for the three months ended March 31, 2017 and 2016, respectively. See Note 10 for further information regarding our relationship with TA and Note 7 for further information regarding the effects of certain of our completed and pending property acquisitions on our leases with TA. Other management agreement and lease matters. We also have hotel management agreements with Hyatt (22 hotels) and Carlson (11 hotels). As of May 9, 2017, all payments due to us from our managers and tenants under these agreements were current. Minimum return payments due to us under these hotel management agreements are supported by guarantees. The guarantee provided by Hyatt with respect to the 22 hotels managed by Hyatt is limited to $50,000 ($18,875 remaining at March 31, 2017). The guarantee provided by Carlson with respect to the 11 hotels managed by Carlson is limited to $40,000 ($29,500 remaining at March 31, 2017). Guarantees and security deposits generally. When we reduce the amounts of the security deposits we hold for payment deficiencies at our managed and leased hotels, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flows to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective lessees or managers who have provided us with these deposits upon expiration of the respective lease or management agreement. The security deposits are non-interest bearing and are not held in escrow. Under these agreements, any amount of the security deposits which are applied to payment deficits may be replenished from a share of future cash flows from the applicable hotel operations pursuant to the terms of the respective agreements. Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $16,924 and $16,429 less than the minimum returns due to us in the three months ended March 31, 2017 and 2016, respectively. When the managers of these hotels fund these shortfalls under the terms of our operating agreements or their guarantees, we reflect such fundings (including security deposit applications) in our condensed consolidated statements of comprehensive income as a reduction of hotel operating expenses. The reduction to hotel operating expenses was $6,662 and $4,377 in the three months ended March 31, 2017 and 2016, respectively. We had shortfalls at certain of our managed hotel portfolios not funded by the managers of these hotels under the terms of our operating agreements of $11,889 and $12,052 in the three months ended March 31, 2017 and 2016, respectively, which represent the unguaranteed portions of our minimum returns from Sonesta. Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $2,791 and $8,363 more than the minimum returns due to us in the three months ended March 31, 2017 and 2016, respectively. Like the security deposits we hold, certain of our guarantees may be replenished by a share of future cash flows from the applicable hotel operations in excess of the minimum returns due to us pursuant to the terms of the respective operating agreements. When our guarantees and our security deposits are replenished by cash flows from hotel operations, we reflect such replenishments in our condensed consolidated statements of comprehensive income as an increase to hotel operating expenses. We had $1,504 and $2,522 of guarantee and security deposit replenishments in the three months ended March 31, 2017 and 2016, respectively.

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