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Hotel Management Agreements and Leases | 9 Months Ended
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Sep. 30, 2017
Leases [Abstract] |
Hotel Management Agreements and Leases | Hotel Management Agreements and Leases As of September 30, 2017, we owned 323 hotels and 199 travel centers, which are included in 14 operating agreements. We do not operate any of our properties. As of September 30, 2017, 320 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 September 30, 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 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 99 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties included in each agreement, 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 September 30, 2017, we are to be paid an annual minimum return of $69,100 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. Marriott’s base and incentive management fees are only earned after we receive our minimum returns. We realized minimum returns of $17,247 and $17,126 during the three months ended September 30, 2017 and 2016, respectively, and minimum returns of $51,657 and $51,361 during the nine months ended September 30, 2017 and 2016, respectively, under this agreement. We also realized additional returns of $3,603 and $6,807 during the three and nine months ended September 30, 2017 and $4,372 and $10,621 during the three and nine months ended September 30, 2016, respectively, which represents our share of hotel cash flows in excess of the minimum returns due to us for the period. 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 the hotels' available cash flows after payment of operating expenses and funding of the FF&E reserve. We funded $4,638 for capital improvements at certain of the hotels included in our Marriott No. 1 agreement during the nine months ended September 30, 2017. We currently expect to fund approximately $1,000 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 September 30, 2017, we are to be paid an annual minimum return of $106,538. We realized minimum returns of $26,591 and $26,571 during the three months ended September 30, 2017 and 2016, respectively, and minimum returns of $79,771 and $79,682 during the nine months ended September 30, 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 nine months ended September 30, 2017, our available security deposit was replenished by $9,986 from a share of hotel cash flows in excess of the minimum returns due to us for the period. The available balance of this security deposit was $26,466 as of September 30, 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. The available balance of the guarantee was $30,672 as of September 30, 2017. We funded $1,975 of capital improvements to hotels under our Marriott No. 234 agreement during the nine months ended September 30, 2017. We currently expect to fund approximately $3,025 for capital improvements to certain hotels under our Marriott No. 234 agreement during the remainder of 2017. As we fund these improvements, the annual minimum returns payable to us increase by 9% of the amounts funded. Marriott No. 5 agreement. We lease one hotel in Kauai, HI to Marriott which requires that, as of September 30, 2017, we are paid annual minimum rents of $10,159. This lease is guaranteed by Marriott and we realized $2,540 and $2,529 of rent for this hotel during the three months ended September 30, 2017 and 2016, respectively, and $7,620 and $7,587 during the nine months ended September 30, 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 99 hotels, or our InterContinental agreement, provides that, as of September 30, 2017, we are to be paid annual minimum returns and rents of $188,920. We realized minimum returns and rents of $46,404 and $40,084 during the three months ended September 30, 2017 and 2016, respectively, and minimum returns and rents of $131,649 and $118,372 during the nine months ended September 30, 2017 and 2016, respectively, under this agreement. We also realized additional returns under this agreement of $8,264 and $3,563 during the three months ended September 30, 2017 and 2016, respectively, and $11,836 and $7,467 during the nine months ended September 30, 2017 and 2016, respectively, from our share of hotel cash flows in excess of the 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 nine months ended September 30, 2017, the available security deposit was replenished by $7,557 from the hotels’ cash flows in excess of the minimum payments due to us for the period. During the nine months ended September 30, 2017, we amended our InterContinental agreement in connection with each of the five 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 $19,696 to supplement the existing security deposit. The available balance of the InterContinental security deposit was at the contractually capped amount of $100,000 as of September 30, 2017. We did not fund any capital improvements to our InterContinental hotels during the nine months ended September 30, 2017. We currently expect to fund approximately $10,950 for capital improvements under our InterContinental agreement during the remainder of 2017, approximately $28,000 during 2018 and approximately $20,000 during 2019. 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 September 30, 2017, Sonesta managed 10 of our full service hotels and 39 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, 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. As of September 30, 2017, the annual minimum return was $108,973. 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 the hotels managed by Sonesta. Accordingly, the returns we receive from our hotels managed by Sonesta are limited to the available hotels’ cash flows after payment of operating expenses. We realized returns of $18,741 and $19,133 during the three months ended September 30, 2017 and 2016, respectively, and returns of $53,808 and $51,279 during the nine months ended September 30, 2017 and 2016, respectively, under our Sonesta agreement. Pursuant to our Sonesta agreement, we recognized management, reservation and system fees and reimbursement costs for certain guest loyalty, marketing program and third party reservation transmission fees aggregating $7,432 and $6,712 for the three months ended September 30, 2017 and 2016, respectively, and $20,719 and $19,007 for the nine months ended September 30, 2017 and 2016, respectively. In addition, we recognized procurement and construction supervision fees of $479 and $344 for the three months ended September 30, 2017 and 2016, respectively, and $673 and $1,268 for the nine months ended September 30, 2017 and 2016, respectively, pursuant to our Sonesta agreement. 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 $21,892 for renovations and other capital improvements to hotels included in our Sonesta agreement during the nine months ended September 30, 2017. We currently expect to fund approximately $7,692 for renovations and other capital improvements during the remainder of 2017, approximately $86,000 during 2018 and approximately $5,000 during 2019. The annual minimum returns due to us under our Sonesta agreement increase by 8% of the amounts funded in excess of threshold amounts, as defined therein. We owed Sonesta $5,685 and $4,467 for capital expenditure and other reimbursements at September 30, 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 September 30, 2017, we are to be paid annual minimum returns of $27,401. We realized returns of $6,847 and $6,687 during the three months ended September 30, 2017 and 2016, respectively, and returns of $20,489 and $20,009 during the nine months ended September 30, 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 nine months ended September 30, 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 a share of future cash flows from these hotels in excess of our minimum returns. As of November 7, 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, as of September 30, 2017, 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 September 30, 2017 and 2016 and $1,361 during both the nine months ended September 30, 2017 and 2016 under our Wyndham Vacation lease agreement. Rental income for the three months ended September 30, 2017 and 2016 for this lease includes $102 and $112, respectively, and $306 and $336 for the nine months ended September 30, 2017 and 2016, 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 nine months ended September 30, 2017 due to insufficient available cash flows generated at these hotels. We funded $5,045 for capital improvements to certain hotels included in our Wyndham agreement during the nine months ended September 30, 2017. We currently expect to fund approximately $1,800 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. Hyatt agreement. Our management agreement with Hyatt for 22 hotels, or our Hyatt agreement, provides that, as of September 30, 2017, we are to be paid an annual minimum return of $22,037. We realized minimum returns of $5,509 during each of the three months ended September 30, 2017 and 2016 and minimum returns of $16,528 during each of the nine months ended September 30, 2017 and 2016 under this agreement. Pursuant to our Hyatt agreement, Hyatt has provided us with a guarantee, which is limited to $50,000. During the nine months ended September 30, 2017, our available guarantee was replenished by $3,517 from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guarantee was $21,826 as of September 30, 2017. Carlson agreement. Our management agreement with Carlson for 8 hotels, or our Carlson agreement, provides that, as of September 30, 2017, we are to be paid an annual minimum return of $12,920. We realized minimum returns of $3,230 during each of the three months ended September 30, 2017 and 2016 and minimum returns of $9,690 during each of the nine months ended September 30, 2017 and 2016 under this agreement. Pursuant to our Carlson agreement, Carlson has provided us with a guarantee, which is limited to $40,000. During the nine months ended September 30, 2017, our available guarantee was replenished by $4,716 from a share of hotel cash flows in excess of the minimum returns due to us. The available balance of the guarantee was $33,545 as of September 30, 2017. In June 2017, we amended our Carlson agreement and agreed to sell three hotels. During the three months ended September 30, 2017, we completed the sale of these three hotels and deposited $15,398 of the net sales proceeds into the FF&E reserve escrow account for our Carlson agreement. The remaining net sales proceeds of $8,030 were deposited into the FF&E reserve escrow account in October 2017. See Note 7 for further information regarding these sales. The net proceeds from these sales will be used to fund certain renovations to the remaining hotels operated under our Carlson agreement and we have agreed to fund up to $35,000 for renovation costs in excess of the net sales proceeds and available FF&E reserves. We currently expect to fund approximately $6,400 during 2018 and approximately $28,600 during 2019 for these renovations. Our annual minimum returns and the limited guaranty cap under our Carlson agreement will increase by 8% of any amounts we fund (excluding the net sales proceeds described above). In addition, in June 2017, the initial term of the management agreement and the limited guarantee provided by Carlson were extended to December 31, 2035. 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, but 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 pursuing this litigation and are 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 November 7, 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 September 30, 2017, we leased to TA a total of 199 travel centers under five leases. We recognized rental income from TA of $73,279 and $69,866 for the three months ended September 30, 2017 and 2016, respectively, and $217,420 and $206,950 for the nine months ended September 30, 2017 and 2016, respectively. Rental income for the three months ended September 30, 2017 and 2016 includes $2,988 and $2,823, respectively, and $8,907 and $10,053 for the nine months ended September 30, 2017 and 2016, 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 September 30, 2017 and December 31, 2016, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $75,231 and $65,332, respectively. These amounts are included in due from related persons in our condensed consolidated balance sheets. In addition, as of September 30, 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 $62,888 and $75,314 for the nine months ended September 30, 2017 and 2016, respectively, of qualifying capital improvements to our TA leases. As a result, TA’s annual minimum rent payable to us increased by $5,345 and $6,402, respectively. We currently expect to fund approximately $16,090 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 and nine months ended September 30, 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 $435 and $408 for the three months ended September 30, 2017 and 2016, respectively, and $1,384 and $937 for the nine months ended September 30, 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 2017 property acquisitions on our leases with TA. 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. The net operating results of our managed hotel portfolios exceeded, in the aggregate, the minimum returns due to us in both the three months ended September 30, 2017 and 2016. Certain of our managed hotel portfolios had net operating results that were, in the aggregate, $5,699 and $2,248 less than the minimum returns due to us in the three months ended September 30, 2017 and 2016, respectively, and $18,971 and $12,618 less than the minimum returns due to us in the nine months ended September 30, 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. There was no reduction to hotel operating expenses in the three months ended September 30, 2017 or 2016 and reductions of $2,689 and $592 in the nine months ended September 30, 2017 and 2016, respectively, as a result of such fundings. 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 $5,699 and $2,248 in the three months ended September 30, 2017 and 2016, respectively, and $16,282 and $12,026 in the nine months ended September 30, 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, $31,355 and $35,123 more than the minimum returns due to us in the three months ended September 30, 2017 and 2016, respectively, and $67,052 and $80,867 more than the minimum returns due to us in the nine months ended September 30, 2017 and 2016, respectively. Like the security deposits we hold, certain guarantees held by us may be replenished by a share of future cash flows from the applicable hotels' 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 $10,099 and $15,103 of guarantee and security deposit replenishments in the three months ended September 30, 2017 and 2016, respectively, and $26,319 and $33,897 of guarantee and security deposit replenishments in the nine months ended September 30, 2017 and 2016, respectively.

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