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Table of Contents


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-32514
DIAMONDROCK HOSPITALITY COMPANY
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
20-1180098
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
2 Bethesda Metro Center, Suite 1400,
Bethesda,
Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)

(Registrant’s telephone number, including area code): (240744-1150

Securities registered pursuant to Section 12(b) of the Securities Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
DRH
New York Stock Exchange
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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes 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
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company o
Emerging growth company o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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
The registrant had 200,196,850 shares of its $0.01 par value common stock outstanding as of November 8, 2019.
 



Table of Contents
INDEX
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents


PART I. FINANCIAL INFORMATION
Item I.
Financial Statements

DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Property and equipment, net
$
3,008,023

 
$
2,944,617

Right-of-use assets
98,496

 

Favorable lease assets, net

 
63,945

Restricted cash
49,579

 
47,735

Due from hotel managers
114,125

 
86,914

Prepaid and other assets
18,249

 
10,506

Cash and cash equivalents
26,723

 
43,863

Total assets
$
3,315,195

 
$
3,197,580

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage and other debt, net of unamortized debt issuance costs
$
619,956

 
$
629,747

Term loans, net of unamortized debt issuance costs
398,699

 
348,219

Senior unsecured credit facility
75,000



Total debt
1,093,655


977,966

 
 
 
 
Deferred income related to key money, net
11,441

 
11,739

Unfavorable contract liabilities, net
67,997

 
73,151

Deferred rent
51,020

 
93,719

Lease liabilities
102,970

 

Due to hotel managers
81,426

 
72,678

Distributions declared and unpaid
25,771

 
26,339

Accounts payable and accrued expenses
70,561

 
51,395

Total liabilities
1,504,841

 
1,306,987

Equity:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 200,196,850 and 204,536,485 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
2,002

 
2,045

Additional paid-in capital
2,087,937

 
2,126,472

Accumulated deficit
(287,582
)
 
(245,620
)
Total stockholders’ equity
1,802,357

 
1,882,897

Noncontrolling interests
7,997

 
7,696

Total equity
1,810,354

 
1,890,593

Total liabilities and equity
$
3,315,195

 
$
3,197,580


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

- 1-


Table of Contents


DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Rooms
$
174,113

 
$
165,750

 
$
492,395

 
$
469,786

Food and beverage
50,624

 
42,922

 
161,803

 
135,286

Other
15,542

 
12,146

 
46,374

 
35,225

Total revenues
240,279

 
220,818

 
700,572

 
640,297

Operating Expenses:
 
 
 
 
 
 
 
Rooms
42,840

 
41,779

 
124,581

 
117,972

Food and beverage
34,262

 
29,047

 
103,868

 
88,202

Management fees
6,088

 
6,099

 
18,745

 
15,542

Franchise fees
6,894

 
6,507

 
19,961

 
19,285

Other hotel expenses
85,157

 
72,224

 
241,955

 
222,152

Depreciation and amortization
29,474

 
26,369

 
87,805

 
77,304

Corporate expenses
6,318

 
4,521

 
20,785

 
22,139

Business interruption insurance income

 
(8,227
)
 
(8,822
)
 
(16,254
)
Gain on property insurance settlement


 
(1,730
)
 

 
(1,730
)
Total operating expenses, net
211,033

 
176,589

 
608,878

 
544,612

Interest and other income, net
(102
)
 
(621
)
 
(510
)
 
(1,428
)
Interest expense
14,184

 
10,233

 
38,264

 
30,384

Loss on early extinguishment of debt
2,373

 

 
2,373

 

Total other expenses, net
16,455

 
9,612

 
40,127

 
28,956

Income before income taxes
12,791

 
34,617

 
51,567

 
66,729

Income tax expense
(1,217
)
 
(3,174
)
 
(1,939
)
 
(2,939
)
Net income
11,574

 
31,443

 
49,628

 
63,790

Less: Net income attributable to noncontrolling interests
(45
)
 

 
(194
)
 

Net income attributable to common stockholders
$
11,529

 
$
31,443

 
$
49,434

 
$
63,790

Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.06

 
$
0.15

 
$
0.24

 
$
0.31

Diluted earnings per share
$
0.06

 
$
0.15

 
$
0.24

 
$
0.31












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

- 2-


Table of Contents



DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(unaudited)


Common Stock











Shares

Par Value

Additional Paid-In Capital

Accumulated Deficit

Total Stockholders' Equity

Noncontrolling Interests

Total Equity
Balance at December 31, 2018
204,536,485


$
2,045


$
2,126,472


$
(245,620
)

$
1,882,897


$
7,696


$
1,890,593

Cumulative effect of ASC 842 adoption

 

 

 
(15,286
)
 
(15,286
)
 

 
(15,286
)
Distributions on common stock/units ($0.125 per common share/unit)




113


(25,483
)

(25,370
)

(134
)

(25,504
)
Share-based compensation
55,916


1


1,073




1,074


83


1,157

Common stock repurchased and retired
(3,143,922
)

(31
)

(29,967
)



(29,998
)



(29,998
)
Net income






8,945


8,945


35


8,980

Balance at March 31, 2019
201,448,479


$
2,015


$
2,097,691


$
(277,444
)

$
1,822,262


$
7,680


$
1,829,942

Distributions on common stock/units ($0.125 per common share/unit)

 

 
120

 
(25,365
)
 
(25,245
)
 
(134
)
 
(25,379
)
Share-based compensation
33,396

 
1

 
1,955

 

 
1,956

 
249

 
2,205

Common stock repurchased and retired
(1,004,589
)
 
(11
)
 
(10,021
)
 

 
(10,032
)
 

 
(10,032
)
Net income

 

 

 
28,960

 
28,960

 
114

 
29,074

Balance at June 30, 2019
200,477,286

 
$
2,005

 
$
2,089,745

 
$
(273,849
)
 
$
1,817,901

 
$
7,909

 
$
1,825,810

Distributions on common stock/units ($0.125 per common share/unit)

 

 
122

 
(25,321
)
 
(25,199
)
 
(130
)
 
(25,329
)
Share-based compensation

 

 
866

 
59

 
925

 
173

 
1,098

Common stock repurchased and retired
(280,436
)
 
(3
)
 
(2,796
)
 

 
(2,799
)
 

 
(2,799
)
Net income

 

 

 
11,529

 
11,529

 
45

 
11,574

Balance at September 30, 2019
200,196,850

 
$
2,002

 
$
2,087,937

 
$
(287,582
)
 
$
1,802,357

 
$
7,997

 
$
1,810,354










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


- 3-


Table of Contents


DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF EQUITY - (CONTINUED)
(in thousands, except share and per share amounts)
(unaudited)

 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2017
200,306,733

 
$
2,003

 
$
2,061,451

 
$
(229,809
)
 
$
1,833,645

 
$

 
$
1,833,645

Distributions on common stock ($0.125 per share)

 

 
111

 
(25,370
)
 
(25,259
)
 

 
(25,259
)
Share-based compensation
25,309

 

 
2,279

 

 
2,279

 

 
2,279

Sale of common stock, net
230,719

 
3

 
2,743

 

 
2,746

 

 
2,746

Net income

 

 

 
4,338

 
4,338

 

 
4,338

Balance at March 31, 2018
200,562,761

 
$
2,006

 
$
2,066,584

 
$
(250,841
)
 
$
1,817,749

 
$

 
$
1,817,749

Distributions on common stock ($0.125 per share)

 

 
118

 
(26,283
)
 
(26,165
)
 

 
(26,165
)
Share-based compensation
35,955

 

 
1,984

 

 
1,984

 

 
1,984

Sale of common stock, net
7,242,227

 
72

 
89,650

 

 
89,722

 

 
89,722

Net income

 

 

 
28,009

 
28,009

 

 
28,009

Balance at June 30, 2018
207,840,943

 
$
2,078

 
$
2,158,336

 
$
(249,115
)
 
$
1,911,299

 
$

 
$
1,911,299

Distributions on common stock ($0.125 per share)

 

 
124

 
(26,271
)
 
(26,147
)
 

 
(26,147
)
Share-based compensation

 

 
(308
)
 
110

 
(198
)
 

 
(198
)
Sale of common stock, net

 

 
(184
)
 

 
(184
)
 

 
(184
)
Net income

 

 

 
31,443

 
31,443

 

 
31,443

Balance at September 30, 2018
207,840,943

 
$
2,078

 
$
2,157,968

 
$
(243,833
)
 
$
1,916,213

 
$

 
$
1,916,213










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

- 4-


Table of Contents


DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2019
 
2018
 
 
Cash flows from operating activities:
 
 
 
Net income
$
49,628

 
$
63,790

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
87,805

 
77,304

Corporate asset depreciation as corporate expenses
170

 
161

Loss on early extinguishment of debt
2,373

 

Non-cash lease expense and other amortization
5,247

 
3,842

Non-cash interest rate swap fair value adjustment
4,790

 

Amortization of debt issuance costs
1,432

 
1,384

Amortization of deferred income related to key money
(297
)
 
(2,469
)
Stock-based compensation
4,882

 
4,104

Changes in assets and liabilities:
 
 
 
Prepaid expenses and other assets
(5,623
)
 
25,489

Due to/from hotel managers
(18,119
)
 
(21,436
)
Accounts payable and accrued expenses
3,420

 
(2,215
)
Net cash provided by operating activities
135,708

 
149,954

Cash flows from investing activities:
 
 
 
Capital expenditures for operating hotels
(75,595
)
 
(76,753
)
Capital expenditures for Frenchman's Reef
(65,208
)
 

Hotel acquisitions

 
(119,537
)
Purchase deposits

 
(2,000
)
Proceeds from property insurance

 
30,742

Net cash used in investing activities
(140,803
)
 
(167,548
)
Cash flows from financing activities:
 
 
 
Scheduled mortgage debt principal payments
(10,374
)
 
(9,947
)
Proceeds from sale of common stock, net

 
92,715

Proceeds from senior unsecured term loan
350,000

 

Repayments of senior unsecured term loans
(300,000
)
 

Draws on senior unsecured credit facility
125,000

 
85,000

Repayments of senior unsecured credit facility
(50,000
)
 
(85,000
)
Payment of financing costs
(4,796
)
 

Distributions on common stock and units
(76,751
)
 
(76,520
)
Repurchase of common stock
(42,828
)
 

Shares redeemed to satisfy tax withholdings on vested share based compensation
(452
)
 
(149
)
Net cash (used in) provided by financing activities
(10,201
)
 
6,099

Net decrease in cash, cash equivalents, and restricted cash
(15,296
)
 
(11,495
)
Cash, cash equivalents, and restricted cash at beginning of period
91,598

 
223,773

Cash, cash equivalents, and restricted cash at end of period
$
76,302

 
$
212,278








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

- 5-


Table of Contents



DIAMONDROCK HOSPITALITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
(unaudited)


Supplemental Disclosure of Cash Flow Information:
 
Nine Months Ended September 30,
 
2019
 
2018
Cash paid for interest
$
32,604

 
$
28,462

Cash paid for income taxes
$
1,310

 
$
2,198

Capitalized interest
$
1,119

 
$

Non-cash cumulative effect of ASC 842 accounting standard adoption
$
15,286

 
$

Non-cash Investing and Financing Activities:
 
 
 
Distributions declared and unpaid
$
25,771

 
$
26,648

Loan assumed in hotel acquisition
$

 
$
2,943


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount shown within the consolidated statements of cash flows:

 
September 30, 2019
 
December 31, 2018
Cash and cash equivalents
$
26,723

 
$
43,863

Restricted cash (1)
49,579

 
47,735

Total cash, cash equivalents, and restricted cash
$
76,302

 
$
91,598

_____________________________

(1)
Restricted cash primarily consists of reserves for replacement of furniture and fixtures held by our hotel managers and cash held in escrow pursuant to lender requirements.


























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

- 6-


Table of Contents


DIAMONDROCK HOSPITALITY COMPANY

Notes to the Consolidated Financial Statements
(Unaudited)

1.
Organization

DiamondRock Hospitality Company (the “Company” or “we”) is a lodging-focused real estate company that owns a portfolio of premium hotels and resorts. Our hotels are concentrated in key gateway cities and in destination resort locations, and the majority of our hotels are operated under a brand owned by one of the leading global lodging brand companies (Marriott International, Inc. (“Marriott”) or Hilton Worldwide (“Hilton”)). We are an owner, as opposed to an operator, of the hotels in our portfolio. As an owner, we receive all of the operating profits or losses generated by our hotels after we pay fees to the hotel managers, which are based on the revenues and profitability of the hotels.

As of September 30, 2019, we owned 31 hotels with 10,102 guest rooms, located in the following markets: Atlanta, Georgia; Boston, Massachusetts (2); Burlington, Vermont; Charleston, South Carolina; Chicago, Illinois (2); Denver, Colorado (2); Fort Lauderdale, Florida; Fort Worth, Texas; Huntington Beach, California; Key West, Florida (2); New York, New York (4); Phoenix, Arizona; Salt Lake City, Utah; San Diego, California; San Francisco, California (2); Sedona, Arizona (2); Sonoma, California; South Lake Tahoe, California; Washington D.C. (2); St. Thomas, U.S. Virgin Islands; and Vail, Colorado. As of September 30, 2019, the Frenchman's Reef & Morning Star Beach Resort (“Frenchman's Reef”) is closed as a result of damage incurred from Hurricanes Irma and Maria in September 2017.

We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of our operating partnership. The Company is the sole general partner of our operating partnership and owns 99.6% of the limited partnership units (“common OP units”) of our operating partnership. The remaining 0.4% of the common OP units are held by third parties. See Note 5 for additional disclosures related to common OP units.

2.
Summary of Significant Accounting Policies

Basis of Presentation

Our financial statements include all of the accounts of the Company and its subsidiaries in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation. If the Company determines that it has an interest in a variable interest entity within the meaning of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Our operating partnership meets the criteria of a variable interest entity. The Company is the primary beneficiary and, accordingly, we consolidate our operating partnership.

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 30, 2019, the results of our operations for the three and nine months ended September 30, 2019 and 2018, the statements of equity for the three and nine months ended September 30, 2019 and 2018, and the cash flows for the nine months ended September 30, 2019 and 2018. Interim results are not necessarily indicative of full-year performance because of the impact of seasonal and short-term variations. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2018, included in our Annual Report on Form 10-K filed on February 26, 2019.

Use of Estimates

The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Property and Equipment

Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based

- 7-


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upon total accumulated cost of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired assets. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 5 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its useful life. Management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel, less costs to sell, exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized.

We will classify a hotel as held for sale in the period that we have made the decision to dispose of the hotel, a binding agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash and no significant financing or other contingencies exist which could cause the transaction to not be completed in a timely manner. If these criteria are met, we will record an impairment loss if the fair value less costs to sell is lower than the carrying amount of the hotel and related assets and will cease recording depreciation expense. We will classify the assets and related liabilities as held for sale on the balance sheet.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Revenue Recognition

Revenues from operations of the hotels are recognized when the goods or services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and resort fees. Rooms revenue is recognized over the length of stay that the hotel room is occupied by the customer. Food and beverage revenue is recognized at the point in time in which the goods and/or services are rendered to the customer, such as for restaurant dining services or banquet services. Other revenues are recognized at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and we assess whether we are the principal or agent in these arrangements. If we are the principal, we recognize revenue based upon the gross sales price.

Advance deposits are recorded as liabilities when a customer or group of customers provides a deposit for a future stay or banquet event at our hotels. Advance deposits are converted to revenue when the services are provided to the customer or when a customer with a noncancelable reservation fails to arrive for part or all of the reservation. Conversely, advance deposits are generally refundable upon guest cancellation of the related reservation within an established period of time prior to the reservation.

Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants or shares issuable in the event of conversion of common OP units. No adjustment is made for shares that are anti-dilutive during a period.

Stock-based Compensation

We account for stock-based employee compensation using the fair value based method of accounting. We record the cost of awards with service or market conditions based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service.


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Income Taxes

We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings during the period in which the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We have elected to be treated as a real estate investment trust (“REIT”) under the provisions of the Internal Revenue Code of 1986, as amended, which requires that we distribute at least 90% of our taxable income annually to our stockholders and comply with certain other requirements. In addition to paying federal and state taxes on any retained income, we may be subject to taxes on “built-in gains” on sales of certain assets. Our taxable REIT subsidiaries will generally be subject to federal, state, local, and/or foreign income taxes.

In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, we lease each of our hotel properties to a wholly owned subsidiary of Bloodstone TRS, Inc., our taxable REIT subsidiary (“TRS”) except for Frenchman’s Reef, which is owned by a Virgin Islands corporation that we have elected to be treated as a TRS, and Cavallo Point, The Lodge at the Golden Gate (“Cavallo Point”), which is leased to a wholly owned subsidiary of the Company that we have elected to be treated as a TRS.

We had no accruals for tax uncertainties as of September 30, 2019 and December 31, 2018.

Fair Value Measurements

In evaluating fair value, U.S. GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the observability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:

Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical
or similar assets in markets that are not active and model-derived valuations whose inputs are observable
Level 3 - Model-derived valuations with unobservable inputs

Intangible Assets and Liabilities

Intangible assets and liabilities are recorded on non-market contracts assumed as part of the acquisition of certain hotels. We review the terms of agreements assumed in conjunction with the purchase of a hotel to determine if the terms are favorable or unfavorable compared to an estimated market agreement at the acquisition date. We do not amortize intangible assets with indefinite useful lives, but we review these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired.

Comprehensive Income

We do not have any comprehensive income other than net income. If we have any comprehensive income in future periods, such that a statement of comprehensive income would be necessary, such statement will be reported as one statement with the consolidated statement of operations.

Derivative Instruments

In the normal course of business, we are exposed to the effects of interest rate changes. We may enter into derivative instruments, including interest rate swaps and caps, to manage or hedge interest rate risk. Derivative instruments are recorded at fair value on the balance sheet date. We have not elected hedge accounting treatment for the changes in the fair value of derivatives.

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Changes in the fair value of derivatives are recorded each period and are included in interest expense in the consolidated statements of operations.

Noncontrolling Interests

The noncontrolling interest is the portion of equity in our operating partnership not attributable, directly or indirectly, to the Company. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from our less-than-wholly-owned operating partnership are reported within 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 stockholders’ equity, noncontrolling interests and total equity.

Restricted Cash

Restricted cash primarily consists of reserves for replacement of furniture and fixtures generally held by our hotel managers and cash held in escrow pursuant to lender requirements.

Debt Issuance Costs

Financing costs are recorded at cost as a component of the debt carrying amount and consist of loan fees and other costs incurred in connection with the issuance of debt. Amortization of debt issuance costs is computed using a method that approximates the effective interest method over the remaining life of the debt and is included in interest expense in the accompanying consolidated statements of operations.

Due to/from Hotel Managers

The due from hotel managers consists of hotel level accounts receivable, periodic hotel operating distributions receivable from managers and prepaid and other assets held by the hotel managers on our behalf. The due to hotel managers represents liabilities incurred by the hotel on behalf of us in conjunction with the operation of our hotels which are legal obligations of the Company.

Key Money

Key money received in conjunction with entering into hotel management or franchise agreements or completing specific capital projects is deferred and amortized over the term of the hotel management agreement, the term of the franchise agreement, or other systematic and rational period, if appropriate. Deferred key money is classified as deferred income in the accompanying consolidated balance sheets and amortized as an offset to management fees or franchise fees.

Leases

We determine if an arrangement is a lease or contains an embedded lease at inception. For agreements with both lease and nonlease components (e.g., common-area maintenance costs), we do not separate the nonlease components from the lease components, but account for these components as one. We determine the lease classification (operating or finance) at lease inception.

Right-of-use assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The discount rate used to determine the present value of the lease payments is our incremental borrowing rate as of the lease commencement date, as the implicit rate is not readily determinable. The right-of-use assets also include any initial direct costs and any lease payments made at or before the commencement date, and is reduced for any unrestricted incentives received at or before the commencement date.

Options to extend or terminate the lease are included in the recognition of our right-of-use assets and lease liabilities when it is reasonably certain that we will exercise the option. Variable payments that are based on an index or a rate are included in the recognition of our right-of-use assets and lease liabilities using the index or rate at lease commencement; however, changes to these lease payments due to rate or index updates are recorded as rent expense in the period incurred. Contingent rentals based on a percentage of sales in excess of stipulated amounts are not included in the measurement of the lease liability and right-of-use asset but will be recognized as variable lease expense when they are incurred. Leases that contain provisions that increase the fixed minimum lease payments based on previously incurred variable lease payments related to performance will be remeasured, as these payments now represent an increase in the fixed minimum payments for the remainder of the lease term. However, leases

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with provisions that increase minimum lease payments based on changes in a reference index or rate (e.g. Consumer Price Index) will not be remeasured as such changes do not constitute a resolution of a contingency.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of our cash and cash equivalents. We maintain cash and cash equivalents with various financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution.

Segment Reporting

Each one of our hotels is an operating segment. We evaluate each of our properties on an individual basis to assess performance, the level of capital expenditures, and acquisition or disposition transactions. Our evaluation of individual properties is not focused on property type (e.g. urban, suburban, or resort), brand, geographic location, or industry classification.

We aggregate our operating segments using the criteria established by U.S. GAAP, including the similarities of our product offering, types of customers and method of providing service. All of our properties react similarly to economic stimulus, such as business investment, changes in Gross Domestic Product, and changes in travel patterns. As such, all our operating segments meet the aggregation criteria, resulting in a single reportable segment represented by our consolidated financial results.

Accounting for Impact of Natural Disasters

Assets destroyed or damaged as a result of natural disasters or other involuntary events are written off or reduced in carrying value to their salvage value. When recovery of all or a portion of the amount of property damage loss or other covered expenses through insurance proceeds is demonstrated to be probable, a receivable is recorded and offsets the loss or expense up to the amount of the total loss or expense. No gain is recorded until all contingencies related to the insurance claim have been resolved. Income resulting from business interruption insurance is not recognized until all contingencies related to the insurance recoveries are resolved.

In September 2017, Hurricane Irma caused significant damage to Frenchman's Reef and Havana Cabana Key West. Frenchman's Reef was further impacted by Hurricane Maria. The Company filed insurance claims for the remediation and repair of property damage and business interruption resulting from the hurricanes, as well as from the 2017 wildfires in Northern California that impacted the Lodge at Sonoma. In July 2018, the Company settled the insurance claims for Havana Cabana Key West and The Lodge at Sonoma. The Frenchman's Reef insurance claim is ongoing. During the three months ended September 30, 2018, we received $32.5 million of insurance proceeds. We received $6.4 million and $85.0 million of insurance proceeds during the nine months ended September 30, 2019 and 2018, respectively. Subsequent to September 30, 2019, we received a commitment from our insurers to receive an additional $40.1 million in insurance proceeds related to the Frenchman's Reef insurance claim. As of November 8, 2019, we have received $35.5 million of the committed amount.

The following table summarizes the business interruption insurance income by impacted hotel (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Frenchman's Reef
$

 
$
5,680

 
$
8,822

 
$
12,965

Havana Cabana Key West

 
1,925

 

 
2,137

The Lodge at Sonoma

 
622

 

 
1,152

Total
$

 
$
8,227

 
$
8,822

 
$
16,254



Recent Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which primarily changes the lessee's accounting for operating leases by requiring recognition of right-of-use assets and lease liabilities. This standard is effective for annual reporting periods beginning after December 15, 2018. We adopted ASU No. 2016-02, along with its related clarifications and amendments (collectively, “ASC 842”), on January 1, 2019. Our consolidated financial statements as of September 30, 2019, and for the three and nine months then ended, are presented in accordance with ASC 842. The primary impact of the new standard is to the treatment of our ground leases, which represent the majority of all of our operating lease payments. Upon adoption, our right-of-use assets were adjusted for deferred rent and favorable and unfavorable lease intangible amounts included on our balance sheet as of

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December 31, 2018. On January 1, 2019, we recognized lease liabilities totaling $101.2 million and right-of-use assets totaling $99.6 million.

We adopted ASC 842 using the modified retrospective approach whereby the cumulative effect of adoption was recognized in accumulated deficit on the adoption date and prior periods were not restated. The adoption of the standard did not have a material impact to our results of operations, cash flows, or liquidity. On adoption of the standard, we elected all available practical expedients provided for in ASC 842, including: (i) no reassessment of whether any expired or existing contracts were or contained leases; (ii) no reassessment of the lease classification for any expired or existing leases; (iii) no reassessment of initial direct costs for any existing leases; and (iv) use of hindsight in determining the lease term and in assessing the likelihood that a purchase option will be exercised. The practical expedients were consistently applied to all existing leases as of January 1, 2019. We also elected an accounting policy to account for leases with an initial term of 12 months or less using existing guidance for operating leases. For lease agreements in which we are the lessor, we have analyzed the standard and determined that there was no material impact to the recognition, measurement, or presentation of these revenues. Room revenues, which constitute the majority of our revenues, are considered short-term leases. We also earn revenues from retail leases at our hotel properties, which are included in other revenue. 

3.
Property and Equipment

Property and equipment as of September 30, 2019 and December 31, 2018 consists of the following (in thousands):

 
September 30, 2019
 
December 31, 2018
Land
$
617,695

 
$
617,695

Land improvements
7,994

 
7,994

Buildings and site improvements
2,723,453

 
2,682,320

Furniture, fixtures and equipment
517,007

 
491,421

Construction in progress
123,286

 
38,623

 
3,989,435

 
3,838,053

Less: accumulated depreciation
(981,412
)
 
(893,436
)
 
$
3,008,023

 
$
2,944,617



As of September 30, 2019 and December 31, 2018, we had accrued capital expenditures of $23.3 million and $12.4 million, respectively.

4. Leases

We are subject to operating leases, the most significant of which are ground leases. We are the lessee to ground leases under nine of our hotels and one parking garage. The lease liabilities for our operating leases assume the exercise of all available extension options, as we believe they are reasonably certain to be exercised. As of September 30, 2019, our operating leases have a weighted-average remaining lease term of 66 years and a weighted-average discount rate of 5.77%.

The components of operating lease expense, which is included in other hotel expenses in our consolidated statements of operations, and cash paid for amounts included in the measurement of lease liabilities, are as follows (in thousands):
 
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
Operating lease cost
 
$
2,834

 
$
8,417

Variable lease payments
 
$
311

 
$
1,137

Cash paid for amounts included in the measurement of operating lease liabilities

 
$
835

 
$
2,421



Maturities of lease liabilities are as follows (in thousands):

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Year Ending December 31,
 
As of September 30, 2019
2019 (excluding the nine months ended September 30, 2019)
 
$
818

2020
 
3,315

2021
 
4,805

2022
 
3,940

2023
 
3,997

Thereafter
 
763,100

Total lease payments
 
779,975

Less imputed interest
 
(677,005
)
Total lease liabilities
 
$
102,970



The future minimum annual rental commitments under all noncancelable operating leases in effect as of December 31, 2018, as determined prior to the adoption of ASC 842 and its related practical expedients, are as follows (in thousands):
Year Ending December 31,
 
As of December 31, 2018
2019
 
$
5,232

2020
 
4,866

2021
 
6,132

2022
 
5,122

2023
 
5,096

Thereafter
 
636,770

 
 
$
663,218



5. Equity

Common Shares

We are authorized to issue up to 400 million shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends out of assets legally available for the payment of dividends when authorized by our board of directors.

We have an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200 million. We did not sell any shares of common stock during the nine months ended September 30, 2019, and the full amount remains available under the ATM Program.

Our board of directors has approved a $250.0 million share repurchase program authorizing us to repurchase shares of our common stock. Repurchases under this program are made in open market or privately negotiated transactions as permitted by federal securities laws and other legal requirements. This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors including stock price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The share repurchase program may be suspended or terminated at any time without prior notice. During the the three months ended September 30, 2019, we repurchased 280,436 shares of our common stock at an average price of $9.96 per share for a total purchase price of $2.8 million. During the nine months ended September 30, 2019, we repurchased 4,428,947 shares of our common stock at an average price of $9.65 per share for a total purchase price of $42.8 million. We retired all repurchased shares on their respective settlement dates. As of November 8, 2019, we have $175.2 million of authorized capacity remaining under our share repurchase program.

Preferred Shares

We are authorized to issue up to 10 million shares of preferred stock, $0.01 par value per share. Our board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of September 30, 2019 and December 31, 2018, there were no shares of preferred stock outstanding.

Operating Partnership Units

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In connection with our acquisition of Cavallo Point in December 2018, we issued 796,684 common OP units to third parties, otherwise unaffiliated with the Company, at $11.76 per unit. Each common OP unit is redeemable at the option of the holder beginning December 12, 2019. Holders of common OP units have certain redemption rights, which enable them to cause our operating partnership to redeem their units in exchange for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option, for shares of our common stock on a one-for-one basis, subject to adjustment upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions. As of September 30, 2019, there were 796,684 common OP units held by unaffiliated third parties.

Long-Term Incentive Partnership units (“LTIP units”), which are also referred to as profits interest units, may be issued to eligible participants under the 2016 Plan (as defined in Note 6 below) for the performance of services to or for the benefit of our operating partnership. LTIP units are a class of partnership unit in our operating partnership and will receive, whether vested or not, the same per-unit distributions as the outstanding common OP units, which equal per-share dividends on shares of our common stock. Initially, LTIP units have a capital account balance of zero, do not receive an allocation of operating income (loss), and do not have full parity with common OP units with respect to liquidating distributions. If such parity is reached, vested LTIP units may be converted, at any time, into an equal number of common OP units, and thereafter will possess all of the rights and interests of common OP units, including the right to exchange the common OP units for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option, for shares of our common stock on a one-for-one basis, subject to adjustment upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions. See Note 6 for additional disclosures related to LTIP units.

Dividends and Distributions

We have paid the following dividends to holders of our common stock and distributions to holders of operating partnership units during 2019 as follows:
Payment Date
 
Record Date
 
Dividend
per Share
January 14, 2019
 
January 4, 2019
 
$
0.125

April 12, 2019
 
March 29, 2019
 
$
0.125

July 12, 2019

June 28, 2019

$
0.125

October 11, 2019

September 30, 2019

$
0.125



6. Stock Incentive Plans

We are authorized to issue up to 6,082,664 shares of our common stock under our 2016 Equity Incentive Plan (the “2016 Plan”), of which we have issued or committed to issue 1,262,120 shares as of September 30, 2019. In addition to these shares, additional shares of common stock could be issued in connection with the performance stock unit awards, as further described below.

Restricted Stock Awards

Restricted stock awards issued to our officers and employees generally vest over a three-year period from the date of the grant based on continued employment. We measure compensation expense for the restricted stock awards based upon the fair market value of our common stock at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying consolidated statements of operations. A summary of our restricted stock awards from January 1, 2019 to September 30, 2019 is as follows:
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2019
641,844

 
$
10.25

Granted
73,240

 
10.65

Vested
(300,575
)
 
10.07

Forfeited
(21,534
)
 
10.37

Unvested balance at September 30, 2019
392,975

 
$
10.46



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The remaining share awards are expected to vest as follows: 9,542 shares during 2019, 229,336 shares during 2020, 130,622 shares during 2021, and 23,475 during 2022. As of September 30, 2019, the unrecognized compensation cost related to restricted stock awards was $2.6 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 18 months. We recorded $0.6 million and $0.2 million of compensation expense related to restricted stock awards for the three months ended September 30, 2019 and 2018, respectively. We recorded $1.9 million and $2.3 million of compensation expense related to restricted stock awards for the nine months ended September 30, 2019 and 2018, respectively. The compensation expense for the nine months ended September 30, 2018 includes $0.6 million related to the accelerated vesting of awards in connection with the departure of our former Chief Financial Officer. In the third quarter of 2018, we entered into a settlement agreement with our former Chief Financial Officer, in which he forfeited certain of his equity awards. As a result, the compensation expense previously recorded related to the forfeited awards was reversed during the third quarter of 2018.

Performance Stock Units

Performance stock units (“PSUs”) are restricted stock units that vest three years from the date of grant. When granted, each executive officer is granted a target number of PSUs (the “PSU Target Award”). For 75% of the PSUs issued in 2016 and vesting in 2019, the actual number of shares of common stock issued to each executive officer is subject to the achievement of certain levels of total stockholder return relative to the total stockholder return of a peer group of publicly traded lodging REITs over a three-year performance period. There will be no payout of shares of our common stock if our total stockholder return falls below the 30th percentile of the total stockholder returns of the peer group. The maximum number of shares of common stock issued to an executive officer is equal to 150% of the PSU Target Award and is earned if our total stockholder return is equal to or greater than the 75th percentile of the total stockholder returns of the peer group. For the remaining 25% of PSUs issued in 2016 and vesting in 2019, the number of shares of common stock to be issued to each executive officer is determined based on achieving improvement in market share for each of our hotels over the three-year performance period based on a report prepared for each hotel by STR Global, a well-recognized and universally accepted benchmarking service for the hospitality industry. For the PSUs issued in 2017, 2018, and 2019, and vesting in 2020, 2021, and 2022, respectively, the calculation of total stockholder return relative to the total stockholder return of a peer group over a three-year performance period determines the number of shares of common stock to be issued to each executive officer for 50% of the PSUs to be earned in the performance period. The number of shares of common stock to be issued to each executive officer for the remaining 50% of the PSUs is determined based on the achievement of improvement in market share for each of our hotels over the three-year performance period. For the PSUs tied to relative stockholder return issued in 2018 and 2019, the number of PSUs to be earned is limited to target if the Company's total stockholder return is negative for the performance period.

We measure compensation expense for the PSUs based upon the fair market value of the award at the grant date. Compensation expense is recognized on a straight-line basis over the three-year performance period and is included in corporate expenses in the accompanying consolidated statements of operations. The grant date fair value of the portion of the PSUs based on our relative total stockholder return is determined using a Monte Carlo simulation performed by a third-party valuation firm. The grant date fair value of the portion of the PSUs based on improvement in market share for each of our hotels is the closing price of our common stock on the grant date.

On March 1, 2019, our board of directors granted 296,050 PSUs to our executive officers. The grant date fair value of the portion of the PSUs based on our relative total stockholder return was $9.68 using the assumptions of volatility of 24.3% and a risk-free rate of 2.54%. The grant date fair value of the portion of the PSUs based on hotel market share was $10.65, the closing stock price of our common stock on such date.

A summary of our PSUs from January 1, 2019 to September 30, 2019 is as follows:
 
Number of
Target Units
 
Weighted-
Average Grant
Date Fair
Value
Unvested balance at January 1, 2019
781,923

 
$
11.19

Granted
296,050

 
10.14

Additional units from dividends
30,778

 
10.02

Vested (1)
(251,375
)
 
8.80

Forfeited
(70,728
)
 
9.93

Unvested balance at September 30, 2019
786,648

 
$
11.18



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______________________
(1)
The number of shares of common stock earned for the PSUs vested in 2019 was equal to 74.33% of the PSU Target Award.

The remaining unvested PSUs are expected to vest as follows: 240,006 units during 2020, 283,910 units during 2021 and 262,732 units during 2022. The number of shares earned upon vesting is subject to the attainment of the performance goals described above. As of September 30, 2019, the unrecognized compensation cost related to the PSUs was $3.7 million and is expected to be recognized on a straight-line basis over a weighted average period of 23 months. We recorded $1.1