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Investments in Affiliates

3 Months Ended

Mar. 31, 2012

Investments in Affiliates

Investments in Affiliates

8. Investments in Affiliates

The Company has a 51% ownership interest in Bay Holdings, which is the sole member of Kapalua Bay LLC (Kapalua Bay). The other members of Bay Holdings through their wholly owned affiliates are Marriott International Inc. (Marriott), 34%, and Exclusive Resorts LLC (ER), 15%. Bay Holdings is not a variable interest entity, as defined in GAAP. The Company accounts for its investment in Bay Holdings using the equity method of accounting because, although it has the ability to exercise significant influence over operating and financial policies, it does not control Bay Holdings through a majority voting interest or other means. Under the LLC agreement, major decisions require the approval of either 75% or 100% of the membership interests. The Company has been designated as the managing member of Bay Holdings. Profits and losses of Bay Holdings were allocated in proportion to the members’ ownership interests, which approximated the estimated cash distributions to the members.

Kapalua Bay constructed a residential and timeshare development called The Ritz-Carlton Club and Residences, Kapalua Bay on land that it owns at the site of the former Kapalua Bay Hotel, and a spa on an adjacent parcel of land that is owned by the Company and leased to Kapalua Bay. Through March 31, 2012, the sale of 28 (84 total) whole-ownership units and 177 (744 total) fractional units have closed escrow.

As a result of the 2009 losses incurred by Bay Holdings, the Company’s carrying value of its investment in Bay Holdings was written down to zero in 2009. The Company does not expect to recover any amounts from its investment in Bay Holdings. The Company will not recognize any additional equity in the earnings (losses) of Bay Holdings until the Company’s income attributable to Bay Holdings exceeds its accumulated losses. The Company had made cash contributions to Bay Holdings of $53.2 million and non-monetary contributions of land valued at $25 million.

Kapalua Bay has a construction loan agreement with Lehman Brothers Holdings Inc. and other lenders under which $280.5 million was outstanding at March 31, 2012, and that matured on August 1, 2011. The loan is collateralized by the project assets including the land that is owned by Kapalua Bay that underlies the project. The Company and the other members of Bay Holdings have guaranteed to the lenders completion of the project and recourse with regard to certain acts, but have not guaranteed repayment of the loan. Kapalua Bay and the lenders had been working on an extension of the loan maturity, however, an extension was not agreed upon and the lenders have notified Kapalua Bay that the loan is in default as of March 13, 2012. Accordingly, the lenders are now entitled to pursue all applicable remedies for a default, including, but not limited to, exercising all rights reserved to Kapalua Bay under the condominium documents, taking title to the remaining unsold units pursuant to foreclosure proceedings (or by voluntary transfer to the lenders by Kapalua Bay), and selling the remaining unsold units to existing contract purchasers or a third party.

The Company has recorded $4.1 million in accrued contract terminations in the condensed consolidated balance sheets as its estimated share of the completion and recourse guarantees. The Company has no other funding commitments to Bay Holdings. See Note 13 for additional information.

Summarized operating information for Bay Holdings for the three months ended March 31, 2012 and 2011 were as follows:

		Three Months Ended
		March 31,
		2012			2011
		(in thousands)
Revenues		$	1,650		$	3,625
Expenses		8,442			8,590
Net Loss		$	(6,792	)	$	(4,965	)