Company Quick10K Filing
Quick10K
Carey Watermark Investors 2
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
8-K 2019-06-25 Shareholder Vote
8-K 2019-04-10 Other Events, Exhibits
8-K 2018-12-14 Officers
8-K 2018-12-06 Officers
8-K 2018-06-21 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-04-11 Other Events, Exhibits
CTT Catchmark Timber Trust 479
GLTR ETFS Precious Metals Basket Trust 421
JMBA Jamba 177
FRAF Franklin Financial Services 140
HMMR Hammer Fiber Optics Holdings 24
DSGT DSG Global 1
RIGHT Right of Reply 0
FIL American Cryostem 0
DREM Dream Homes & Development 0
TRMM Trupal 0
CWI2 2019-06-30
Part I - Financial Information
Item 1. Financial Statements.
Note 1. Business
Note 2. Basis of Presentation
Note 3. Agreements and Transactions with Related Parties
Note 4. Net Investments in Hotels
Note 5. Equity Investments in Real Estate
Note 6. Fair Value Measurements
Note 7. Risk Management and Use of Derivative Financial Instruments
Note 8. Debt
Note 9. Commitments and Contingencies
Note 10. Income per Share and Equity
Note 11. Income Taxes
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 2. Unregistered Sales of Equity Securities.
Item 6. Exhibits.
EX-31.1 cwi22019q210-qexh311.htm
EX-31.2 cwi22019q210-qexh312.htm
EX-32 cwi22019q210-qexh32.htm

Carey Watermark Investors 2 Earnings 2019-06-30

CWI2 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cwi22019q210-q.htm 10-Q Document
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended June 30, 2019
 
 
 
or
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                     to                       
Commission File Number: 000-55461
cwi2highreslogo22.jpg
CAREY WATERMARK INVESTORS 2 INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
46-5765413
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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 þ No o

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 þ No o

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 o
Accelerated filer o
Non-accelerated filer þ
 
 
 
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 provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Registrant has 32,241,753 shares of Class A common stock, $0.001 par value, and 60,269,867 shares of Class T common stock, $0.001 par value, outstanding at August 2, 2019.
 



INDEX

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements about the impact of Hurricane Irma on certain hotels, including the condition of the properties and cost estimates. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission (“SEC”), including but not limited to those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC on March 15, 2019 (the “2018 Annual Report”). Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).


CWI 2 6/30/2019 10-Q 1


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS 2 INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Investments in real estate:
 
 
 
Hotels, at cost
$
1,463,277

 
$
1,464,933

Accumulated depreciation
(135,182
)
 
(113,184
)
Net investments in hotels
1,328,095

 
1,351,749

Equity investments in real estate
124,042

 
121,456

Cash and cash equivalents
73,231

 
76,823

Restricted cash
29,490

 
27,114

Accounts receivable, net
29,038

 
18,826

Other assets
10,381

 
9,346

Total assets (a)
$
1,594,277

 
$
1,605,314

Liabilities and Equity
 
 
 
Non-recourse debt, net
$
832,690

 
$
833,836

Accounts payable, accrued expenses and other liabilities
60,937

 
61,913

Due to related parties and affiliates
1,780

 
1,984

Distributions payable
11,362

 
11,178

Total liabilities (a)
906,769

 
908,911

Commitments and contingencies (Note 9)

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued

 

Class A common stock, $0.001 par value; 320,000,000 shares authorized; 31,888,790 and 31,023,863 shares, respectively, issued and outstanding
32

 
31

Class T common stock, $0.001 par value; 80,000,000 shares authorized;59,700,870 and 59,006,632 shares, respectively, issued and outstanding
60

 
59

Additional paid-in capital
837,414

 
825,896

Distributions and accumulated losses
(177,533
)
 
(156,823
)
Accumulated other comprehensive income
161

 
1,205

Total stockholders’ equity
660,134

 
670,368

Noncontrolling interests
27,374

 
26,035

Total equity
687,508

 
696,403

Total liabilities and equity
$
1,594,277

 
$
1,605,314

__________
(a)
See Note 2 for details related to variable interest entities (“VIEs”).

See Notes to Consolidated Financial Statements.


CWI 2 6/30/2019 10-Q 2


CAREY WATERMARK INVESTORS 2 INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
Rooms
$
66,007

 
$
66,695

 
$
130,601

 
$
127,284

Food and beverage
23,397

 
25,880

 
49,811

 
51,095

Other operating revenue
5,690

 
5,525

 
10,688

 
10,900

Total Hotel Revenues
95,094

 
98,100

 
191,100

 
189,279

Expenses
 
 
 
 
 
 
 
Rooms
14,101

 
14,829

 
28,020

 
28,872

Food and beverage
17,020

 
18,021

 
35,264

 
35,573

Other hotel operating expenses
1,270

 
1,501

 
2,412

 
2,837

General and administrative
8,749

 
8,204

 
17,134

 
16,044

Sales and marketing
8,119

 
7,834

 
15,992

 
15,630

Property taxes, insurance, rent and other
5,947

 
5,355

 
11,540

 
10,727

Management fees
3,312

 
3,622

 
6,791

 
6,724

Repairs and maintenance
3,241

 
2,905

 
6,450

 
5,886

Utilities
2,298

 
2,259

 
4,268

 
4,443

Depreciation
11,959

 
11,416

 
23,718

 
22,752

Total Hotel Operating Expenses
76,016

 
75,946

 
151,589

 
149,488

Asset management fees to affiliate and other expenses
2,725

 
2,909

 
5,634

 
5,489

Corporate general and administrative expenses
2,256

 
2,028

 
4,384

 
3,839

Loss (gain) on hurricane-related property damage

 
901

 
(10
)
 
589

Total Expenses
80,997

 
81,784

 
161,597

 
159,405

Operating Income
14,097

 
16,316

 
29,503

 
29,874

Interest expense
(10,151
)
 
(10,163
)
 
(20,250
)
 
(20,099
)
Equity in losses of equity method investments in real estate, net
(136
)
 
(535
)
 
(1,477
)
 
(2,392
)
Other income
232

 
93

 
414

 
186

Income before income taxes
4,042

 
5,711

 
8,190

 
7,569

 (Provision for) benefit from income taxes
(1,243
)
 
(1,377
)
 
62

 
(1,653
)
Net Income
2,799

 
4,334

 
8,252

 
5,916

Income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,191, $761, $3,129 and $2,216, respectively)
(1,840
)
 
(1,249
)
 
(6,269
)
 
(4,327
)
Net Income Attributable to CWI 2 Stockholders
$
959

 
$
3,085

 
$
1,983

 
$
1,589

 
 
 
 
 
 
 
 
Class A Common Stock
 
 
 
 
 
 
 
Net income attributable to CWI 2 Stockholders
$
370

 
$
1,104

 
$
768

 
$
648

Basic and diluted weighted-average shares outstanding
31,805,101

 
30,189,278

 
31,599,698

 
30,006,248

Basic and diluted income per share
$
0.01

 
$
0.04

 
$
0.02

 
$
0.02

 
 
 
 
 
 
 
 
Class T Common Stock
 
 
 
 
 
 
 
Net income attributable to CWI 2 Stockholders
$
589

 
$
1,981

 
$
1,215

 
$
941

Basic and diluted weighted-average shares outstanding
59,872,699

 
58,758,378

 
59,687,602

 
58,570,885

Basic and diluted income per share
$
0.01

 
$
0.03

 
$
0.02

 
$
0.02


See Notes to Consolidated Financial Statements.

CWI 2 6/30/2019 10-Q 3




CAREY WATERMARK INVESTORS 2 INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net Income
$
2,799

 
$
4,334

 
$
8,252

 
$
5,916

Other Comprehensive (Loss) Income
 
 
 
 
 
 
 
Unrealized (loss) gain on derivative instruments
(508
)
 
45

 
(1,042
)
 
839

Comprehensive Income
2,291

 
4,379

 
7,210

 
6,755

 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net income
(1,840
)
 
(1,249
)
 
(6,269
)
 
(4,327
)
Unrealized (gain) loss on derivative instruments
(2
)
 
11

 
(2
)
 
(1
)
Comprehensive income attributable to noncontrolling interests
(1,842
)
 
(1,238
)
 
(6,271
)
 
(4,328
)
Comprehensive Income Attributable to CWI 2 Stockholders
$
449

 
$
3,141

 
$
939

 
$
2,427


See Notes to Consolidated Financial Statements.


CWI 2 6/30/2019 10-Q 4


CAREY WATERMARK INVESTORS 2 INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(in thousands, except share and per share amounts)

 
CWI 2 Stockholders
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Distributions
and
Accumulated
Losses
 
Accumulated
Other
Comprehensive
Income
 
Total CWI 2
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Class A
 
Class T
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at April 1, 2019
31,543,757

 
$
31

 
59,591,414

 
$
60

 
$
835,180

 
$
(167,130
)
 
$
671

 
$
668,812

 
$
28,342

 
$
697,154

Net income
 
 
 
 
 
 
 
 
 
 
959

 
 
 
959

 
1,840

 
2,799

Shares issued, net of offering costs
181,386

 

 
393,862

 

 
6,555

 
 
 
 
 
6,555

 
 
 
6,555

Shares issued to affiliates
239,649

 
1

 
 
 
 
 
2,734

 
 
 
 
 
2,735

 
 
 
2,735

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(2,810
)
 
(2,810
)
Stock dividends issued
93,719

 

 
177,052

 

 
 
 
 
 
 
 

 
 
 

Shares issued under share incentive plans
19,352

 

 
 
 
 
 
(13
)
 
 
 
 
 
(13
)
 
 
 
(13
)
Stock-based compensation to directors
15,776

 

 
 
 
 
 
180

 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.1749 and $0.1489 per share to Class A and Class T, respectively)
 
 
 
 
 
 
 
 
 
 
(11,362
)
 
 
 
(11,362
)
 
 
 
(11,362
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
 
 
 
(510
)
 
(510
)
 
2

 
(508
)
Repurchase of shares
(204,849
)
 

 
(461,458
)
 

 
(7,222
)
 
 
 
 
 
(7,222
)
 
 
 
(7,222
)
Balance at June 30, 2019
31,888,790

 
$
32

 
59,700,870

 
$
60

 
$
837,414

 
$
(177,533
)
 
$
161

 
$
660,134

 
$
27,374

 
$
687,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1, 2018
30,035,758

 
$
29

 
58,483,227

 
$
58

 
$
817,240

 
$
(117,281
)
 
$
2,155

 
$
702,201

 
$
28,652

 
$
730,853

Net income
 
 
 
 
 
 
 
 
 
 
3,085

 
 
 
3,085

 
1,249

 
4,334

Shares issued, net of offering costs
193,357

 
1

 
405,041

 
1

 
6,643

 
 
 
 
 
6,645

 
 
 
6,645

Shares issued to affiliates
240,015

 

 
 
 
 
 
2,666

 
 
 
 
 
2,666

 
 
 
2,666

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(2,872
)
 
(2,872
)
Stock dividends issued
91,648

 

 
178,450

 

 
 
 
 
 
 
 

 
 
 

Shares issued under share incentive plans
17,535

 

 
 
 
 
 
(19
)
 
 
 
 
 
(19
)
 
 
 
(19
)
Stock-based compensation to directors
15,384

 

 
 
 
 
 
171

 
 
 
 
 
171

 
 
 
171

Distributions declared ($0.1749 and $0.1486 per share to Class A and Class T, respectively)
 
 
 
 
 
 
 
 
 
 
(10,979
)
 
 
 
(10,979
)
 
 
 
(10,979
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
56

 
56

 
(11
)
 
45

Repurchase of shares
(353,680
)
 

 
(546,634
)
 
(1
)
 
(9,523
)
 
 
 
 
 
(9,524
)
 
 
 
(9,524
)
Balance at June 30, 2018
30,240,017

 
$
30

 
58,520,084

 
$
58

 
$
817,178

 
$
(125,175
)
 
$
2,211

 
$
694,302

 
$
27,018

 
$
721,320






CWI 2 6/30/2019 10-Q 5


CAREY WATERMARK INVESTORS 2 INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
(Continued)
(in thousands, except share and per share amounts)

 
CWI 2 Stockholders
 
 
 
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Distributions
and
Accumulated
Losses
 
Accumulated
Other
Comprehensive
Income
 
Total CWI 2
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
Class A
 
Class T
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at January 1, 2019
31,023,863

 
$
31

 
59,006,632

 
$
59

 
$
825,896

 
$
(156,823
)
 
$
1,205

 
$
670,368

 
$
26,035

 
$
696,403

Net income
 
 
 
 
 
 
 
 
 
 
1,983

 
 
 
1,983

 
6,269

 
8,252

Shares issued, net of offering costs
369,275

 

 
798,597

 
1

 
13,138

 
 
 
 
 
13,139

 
 
 
13,139

Shares issued to affiliates
474,291

 
1

 
 
 
 
 
5,341

 
 
 
 
 
5,342

 
 
 
5,342

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(4,932
)
 
(4,932
)
Stock dividends issued
188,382

 

 
357,099

 

 
 
 
 
 
 
 

 
 
 

Shares issued under share incentive plans
19,352

 

 
 
 
 
 
51

 
 
 
 
 
51

 
 
 
51

Stock-based compensation to directors
18,476

 

 
 
 
 
 
210

 
 
 
 
 
210

 
 
 
210

Distributions declared ($0.3498 and $0.2983 per share to Class A and Class T, respectively)
 
 
 
 
 
 
 
 
 
 
(22,693
)
 
 
 
(22,693
)
 
 
 
(22,693
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
 
 
 
 
 
(1,044
)
 
(1,044
)
 
2

 
(1,042
)
Repurchase of shares
(204,849
)
 

 
(461,458
)
 

 
(7,222
)
 
 
 
 
 
(7,222
)
 
 
 
(7,222
)
Balance at June 30, 2019
31,888,790

 
$
32

 
59,700,870

 
$
60

 
$
837,414

 
$
(177,533
)
 
$
161

 
$
660,134

 
$
27,374

 
$
687,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
29,510,914

 
$
29

 
57,871,712

 
$
58

 
$
807,377

 
$
(104,809
)
 
$
1,373

 
$
704,028

 
$
27,757

 
$
731,785

Net income
 
 
 
 
 
 
 
 
 
 
1,589

 
 
 
1,589

 
4,327

 
5,916

Shares issued, net of offering costs
393,904

 
1

 
833,888

 
1

 
13,952

 
 
 
 
 
13,954

 
 
 
13,954

Shares issued to affiliates
473,984

 

 
 
 
 
 
5,179

 
 
 
 
 
5,179

 
 
 
5,179

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
(5,067
)
 
(5,067
)
Stock dividends issued
184,797

 

 
361,118

 

 
 
 
 
 
 
 

 
 
 

Shares issued under share incentive plans
17,535

 

 
 
 
 
 
51

 
 
 
 
 
51

 
 
 
51

Stock-based compensation to directors
15,384

 

 
 
 
 
 
171

 
 
 
 
 
171

 
 
 
171

Distributions declared ($0.3498 and $0.2978 per share to Class A and Class T, respectively)
 
 
 
 
 
 
 
 
 
 
(21,955
)
 
 
 
(21,955
)
 
 
 
(21,955
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
838

 
838

 
1

 
839

Repurchase of shares
(356,501
)
 

 
(546,634
)
 
(1
)
 
(9,552
)
 
 
 
 
 
(9,553
)
 
 
 
(9,553
)
Balance at June 30, 2018
30,240,017

 
$
30

 
58,520,084

 
$
58

 
$
817,178

 
$
(125,175
)
 
$
2,211

 
$
694,302

 
$
27,018

 
$
721,320


See Notes to Consolidated Financial Statements.

CWI 2 6/30/2019 10-Q 6


CAREY WATERMARK INVESTORS 2 INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash Flows — Operating Activities
 
 
 
Net income
$
8,252

 
$
5,916

Adjustments to net income:
 
 
 
Depreciation
23,718

 
22,752

Asset management fees to affiliates settled in shares
5,367

 
5,186

Equity in losses of equity method investments in real estate, net
1,477

 
2,392

Amortization of deferred key money, deferred financing costs and other
610

 
666

Amortization of stock-based compensation expense
369

 
321

(Gain) loss on hurricane-related property damage
(10
)
 
589

Net changes in other assets and liabilities
(6,245
)
 
(4,187
)
Distributions of earnings from equity method investments
996

 
812

Business interruption insurance proceeds
881

 

Decrease in due to related parties and affiliates
(79
)
 
(97
)
Funding of hurricane-related remediation work

 
(163
)
Net Cash Provided by Operating Activities
35,336

 
34,187

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Capital contributions to equity investment in real estate
(5,145
)
 
(486
)
Capital expenditures
(5,112
)
 
(7,937
)
Distributions from equity investments in excess of cumulative equity income

 
4,972

Net Cash Used in Investing Activities
(10,257
)
 
(3,451
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Distributions paid
(22,509
)
 
(21,933
)
Net proceeds from issuance of shares
10,313

 
10,423

Repurchase of shares
(7,222
)
 
(9,553
)
Distributions to noncontrolling interests
(4,932
)
 
(5,067
)
Scheduled payments and prepayments of mortgage principal
(1,837
)
 
(219
)
Withholdings on restricted stock units
(108
)
 
(99
)
Deferred financing costs

 
(39
)
Net Cash Used in Financing Activities
(26,295
)
 
(26,487
)
 
 
 
 
Change in Cash and Cash Equivalents and Restricted Cash During the Period
 
 
 
Net (decrease) increase in cash and cash equivalents and restricted cash
(1,216
)
 
4,249

Cash and cash equivalents and restricted cash, beginning of period
103,937

 
98,109

Cash and cash equivalents and restricted cash, end of period
$
102,721

 
$
102,358


See Notes to Consolidated Financial Statements.

CWI 2 6/30/2019 10-Q 7


Notes to Consolidated Financial Statements (Unaudited)

CAREY WATERMARK INVESTORS 2 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business

Organization

Carey Watermark Investors 2 Incorporated (“CWI 2”) is a publicly owned, non-traded real estate investment trust (“REIT”) that, together with its consolidated subsidiaries, invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties in the United States. We conduct substantially all of our investment activities and own all of our assets through CWI 2 OP, LP (the “Operating Partnership”). We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings 2, LLC (“Carey Watermark Holdings 2”), which is owned indirectly by W. P. Carey Inc. (“WPC”), holds a special general partner interest in the Operating Partnership.

We are managed by Carey Lodging Advisors, LLC (our “Advisor”), an indirect subsidiary of WPC. Our Advisor manages our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. CWA 2, LLC (the “Subadvisor”), a subsidiary of Watermark Capital Partners LLC, provides services to our Advisor primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that manage the day-to-day operations of our hotels. In addition, the Subadvisor provides us with the services of Mr. Michael G. Medzigian, our Chief Executive Officer, subject to the approval of our independent directors.

We held ownership interests in 12 hotels at June 30, 2019, including ten hotels that we consolidate (“Consolidated Hotels”) and two hotels that we record as equity investments (“Unconsolidated Hotels”).
 
Public Offering

We raised offering proceeds in our initial public offering of $280.3 million from our Class A common stock and $571.0 million from our Class T common stock. The offering commenced in May 2014 and closed in July 2017. We have fully invested the proceeds from our offering. In addition, from inception through June 30, 2019, $24.8 million and $49.2 million of distributions were reinvested in our Class A and Class T common stock, respectively, through our distribution reinvestment plan (“DRIP”).

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”).

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2018, which are included in our 2018 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.


CWI 2 6/30/2019 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. There have been no significant changes in our VIE policies from what was disclosed in the 2018 Annual Report.

At June 30, 2019 and December 31, 2018, we considered three and four entities to be VIEs, respectively, of which we consolidated two and three, respectively, as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
 
June 30, 2019
 
December 31, 2018
Net investments in hotels
$
287,570

 
$
566,272

Total assets
316,683

 
603,403

 
 
 
 
Non-recourse debt, net
$
176,901

 
$
320,603

Total liabilities
194,910

 
350,920


Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current period presentation.

Restricted Cash

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
 
June 30, 2019
 
December 31, 2018
Cash and cash equivalents
$
73,231

 
$
76,823

Restricted cash
29,490

 
27,114

Total cash and cash equivalents and restricted cash
$
102,721

 
$
103,937


Recent Accounting Pronouncements

Pronouncements Adopted as of June 30, 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract: the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, are capitalized and recorded on the balance sheet. For lessors, however, the new standard remains generally consistent with existing guidance, but has been updated to align with certain changes to the lessee model and ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

We adopted this guidance for our interim and annual periods beginning January 1, 2019 using the modified retrospective method, applying the transition provisions at the beginning of the period of adoption rather than at the beginning of the earliest comparative period presented. We elected the package of practical expedients as permitted under the transition guidance, which allowed us to not reassess whether arrangements contain leases, lease classification and initial direct costs. The adoption of the lease standard did not result in a cumulative effect adjustment recognized in the opening balance of retained earnings as of January 1, 2019. On January 1, 2019, we recognized a right-of-use asset and a corresponding lease liability related to our operating leases of $1.5 million and $2.3 million, respectively, in Other assets and Accounts payable, accrued expenses and other liabilities, respectively, in our consolidated balance sheet.


CWI 2 6/30/2019 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 makes more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions in exchange for goods and services from nonemployees, which will align the accounting for such payments to nonemployees with the existing requirements for share-based payments granted to employees (with certain exceptions). These share-based payments will now be measured at the grant-date fair value of the equity instrument issued. We adopted this guidance for our interim and annual periods beginning January 1, 2019. The adoption of this standard did not have a material impact on our consolidated financial statements.

Note 3. Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

We have an advisory agreement with our Advisor (the “Advisory Agreement”) to perform certain services for us under a fee arrangement, including managing our overall business, our investments and certain administrative duties. The Advisory Agreement has a term of one year and may be renewed for successive one-year periods. Our Advisor also has a subadvisory agreement with the Subadvisor (the “Subadvisory Agreement”) whereby our Advisor pays 25% of its fees earned under the Advisory Agreement and Available Cash Distributions (as defined below) and 30% of the subordinated incentive distributions to the Subadvisor in return for certain personnel services.

The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
2,683

 
$
2,607

 
$
5,367

 
$
5,186

Available Cash Distributions
1,191

 
761

 
3,129

 
2,216

Personnel and overhead reimbursements
1,005

 
1,005

 
2,105

 
2,002

 
$
4,879

 
$
4,373

 
$
10,601

 
$
9,404


The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
 
June 30, 2019
 
December 31, 2018
Amounts Due to Related Parties and Affiliates
 
 
 
Asset management fees and other to our Advisor
$
914

 
$
884

Reimbursable costs due to our Advisor
866

 
1,100

 
$
1,780

 
$
1,984



CWI 2 6/30/2019 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)

Asset Management Fees, Disposition Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.55% of the aggregate average market value of our investments, as described in the Advisory Agreement. Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement are met. If our Advisor elects to receive all or a portion of its fees in shares of our Class A common stock, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share (“NAV”) for Class A shares. For the six months ended June 30, 2019 and 2018, we settled $5.3 million and $5.2 million, respectively, of asset management fees in shares of our Class A common stock at our Advisor’s election. At June 30, 2019, our Advisor owned 3,017,784 shares (3.3%) of our total outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Available Cash Distributions

Carey Watermark Holdings 2’s special general partner interest entitles it to receive distributions of 10% of Available Cash, as defined in the limited partnership agreement of the Operating Partnership (“Available Cash Distributions”) generated by the Operating Partnership, subject to certain limitations. In addition, in the event of the dissolution of the Operating Partnership, Carey Watermark Holdings 2 will be entitled to receive distributions of up to 15% of net proceeds, provided certain return thresholds are met for the initial investors in the Operating Partnership. Available Cash Distributions are included in Income attributable to noncontrolling interests in the consolidated financial statements.

Personnel and Overhead Reimbursements/Reimbursable Costs

Under the terms of the Advisory Agreement, our Advisor generally allocates expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and our affiliate, Carey Watermark Investors Incorporated (“CWI 1”), based on total pro rata hotel revenues on a quarterly basis. CWI 1 is a publicly owned, non-traded REIT that is also advised by our Advisor and invests in lodging and lodging-related properties. Pursuant to the Subadvisory Agreement, after we reimburse our Advisor, it will subsequently reimburse the Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our board of directors. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements and are settled in cash. We have also granted restricted stock units to employees of the Subadvisor pursuant to our 2015 Equity Incentive Plan.

Other Transactions with Affiliates

Working Capital Facility

On October 19, 2017, our Operating Partnership entered into a $25.0 million secured credit facility with WPC to fund our working capital needs (the “Working Capital Facility”). Pursuant to the related credit agreement, as amended, the Working Capital Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus 1.0% provided however, that upon the occurrence of certain events of default (as described in the loan agreement), all outstanding amounts will be subject to a 2.0% annual interest rate increase. The Working Capital Facility matures on the earlier of December 31, 2019 and the expiration or termination of the Advisory Agreement. We serve as guarantor of the Working Capital Facility and have pledged our unencumbered equity interest in certain properties as collateral, as further described in the related pledge and security agreement. At both June 30, 2019 and December 31, 2018, no amounts were outstanding under the Working Capital Facility.

Jointly-Owned Investments

At June 30, 2019, we owned interests in three ventures with CWI 1: the Marriott Sawgrass Golf Resort & Spa, a Consolidated Hotel, and the Ritz-Carlton Key Biscayne and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third party also owns an interest in the Ritz-Carlton Key Biscayne.


CWI 2 6/30/2019 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
June 30, 2019
 
December 31, 2018
Buildings
$
1,090,339

 
$
1,093,865

Land
236,078

 
236,078

Furniture, fixtures and equipment
93,351

 
93,766

Building and site improvements
40,374

 
38,670

Construction in progress
3,135

 
2,554

Hotels, at cost
1,463,277

 
1,464,933

Less: Accumulated depreciation
(135,182
)
 
(113,184
)
Net investments in hotels
$
1,328,095

 
$
1,351,749


During the six months ended June 30, 2019 and 2018, we retired fully depreciated furniture, fixtures and equipment aggregating $1.7 million and $0.7 million, respectively.

Hurricane-Related Disruption

The Marriott Sawgrass Golf Resort & Spa was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a short period of time. Below is a summary of the items that comprised the (gain) loss recognized by the venture related to Hurricane Irma (in thousands):
 
Three Months Ended June 30,
 
2019
 
2018
Net write-off of fixed assets
$
543

 
$
150

Remediation work performed

 
486

(Increase) decrease to property damage insurance receivables
(543
)
 
265

Loss on hurricane-related property damage (a)
$

 
$
901


 
Six Months Ended June 30,
 
2019
 
2018
Net write-off (write-up) of fixed assets
$
3,586

 
$
(426
)
Remediation work performed

 
110

(Increase) decrease to property damage insurance receivables
(3,596
)
 
905

(Gain) loss on hurricane-related property damage (a)
$
(10
)
 
$
589

_________
(a)
Includes losses totaling $0.7 million and $1.3 million during the three and six months ended June 30, 2018, respectively, resulting from pre-existing damage (which was discovered as a result of the hurricane and is not covered by insurance).

As the restoration work continues to be performed, the estimated total costs will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional restoration work will be recorded in the periods in which it is performed. 


CWI 2 6/30/2019 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)

Construction in Progress

At June 30, 2019 and December 31, 2018, construction in progress, recorded at cost, was $3.1 million and $2.6 million, respectively; which at June 30, 2019 was primarily related to planned renovations at the Ritz-Carlton San Francisco and San Jose Marriott, as well as the restoration of the Marriott Sawgrass Golf Resort & Spa as a result of the damage caused by Hurricane Irma; and at December 31, 2018 was primarily related to planned renovations at the Ritz-Carlton San Francisco and the Renaissance Atlanta Midtown Hotel, as well as the restoration of the Marriott Sawgrass Golf Resort & Spa. Upon substantial completion of renovation work, costs are reclassified from construction in progress to buildings, building and site improvements and furniture, fixture and equipment, as applicable, and depreciation will commence.

We capitalize qualifying interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized less than $0.1 million of such costs during both the three months ended June 30, 2019 and 2018, and less than $0.1 million and $0.1 million during the six months ended June 30, 2019 and 2018, respectively. At June 30, 2019 and December 31, 2018, accrued capital expenditures were $0.4 million and $1.4 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At June 30, 2019, we owned equity interests in two Unconsolidated Hotels, one with CWI 1 and one together with CWI 1 and an unrelated third party. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Advisor that we incur and other-than-temporary impairment charges, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. Therefore, we follow the hypothetical liquidation at book value (“HLBV”) method in determining our share of these ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment was hypothetically liquidated at the end of each reporting period.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
Unconsolidated Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Hotel Type
 
Carrying Value at
 
 
 
 
 
June 30, 2019
 
December 31, 2018
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)
 
CA
 
358

 
60.0
%
 
Resort
 
$
86,687

 
$
85,110

Ritz-Carlton Key Biscayne Venture (c) (d)
 
FL
 
445

 
19.3
%
 
Resort
 
37,355

 
36,346

 
 
 
 
803

 
 
 
 
 
$
124,042

 
$
121,456

___________
(a)
This investment represents a tenancy-in-common interest; the remaining 40.0% interest is owned by CWI 1.
(b)
We contributed $2.6 million and $5.1 million to this investment during the three and six months ended June 30, 2019, respectively, which included funding for the hotel’s renovation.
(c)
CWI 1 acquired a 47.4% interest in the venture on the same date.  The remaining 33.3% interest is retained by the original owner. The number of rooms presented includes 143 condo-hotel units that participate in the resort rental program. This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.
(d)
We received $0.5 million and $1.0 million of cash distributions from this investment during the three and six months ended June 30, 2019, respectively.


CWI 2 6/30/2019 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which is based on the HLBV model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Unconsolidated Hotels
 
2019
 
2018
 
2019
 
2018
Ritz-Carlton Bacara, Santa Barbara Venture
 
$
(519
)
 
$
(1,332
)
 
$
(3,483
)
 
$
(4,255
)
Ritz-Carlton Key Biscayne Venture
 
383

 
797

 
2,006

 
1,863

Total equity in losses of equity method investments in real estate, net
 
$
(136
)
 
$
(535
)
 
$
(1,477
)
 
$
(2,392
)

No other-than-temporary impairment charges related to our investments in these ventures were recognized during the three or six months ended June 30, 2019 or 2018.

At June 30, 2019 and December 31, 2018, the unamortized basis differences on our equity investments were $7.6 million and $7.8 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.1 million during both the three months ended June 30, 2019 and 2018 and by $0.1 million and $0.2 million during the six months ended June 30, 2019 and 2018, respectively.

The following tables present combined summarized financial information of our equity investments in real estate. Amounts provided are the total amounts attributable to the ventures and does not represent our proportionate share (in thousands):
 
June 30, 2019
 
December 31, 2018
Real estate, net
$
642,405

 
$
643,145

Other assets
70,317

 
66,027

Total assets
712,722

 
709,172

Debt
414,740

 
415,973

Other liabilities
40,517

 
42,099

Total liabilities
455,257

 
458,072

Members’ equity
$
257,465

 
$
251,100


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
45,555

 
$
48,539

 
$
96,392

 
$
99,686

Expenses
(44,815
)
 
(48,639
)
 
(94,759
)
 
(98,294
)
Net income (loss) attributable to equity method investments
$
740

 
$
(100
)
 
$
1,633

 
$
1,392


Note 6. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.


CWI 2 6/30/2019 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)

Items Measured at Fair Value on a Recurring Basis

Derivative Assets — Our derivative assets, which are included in Other assets in the consolidated financial statements, are comprised of interest rate caps and swaps (Note 7).

The valuation of our derivative instruments is determined using a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and implied volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative instruments for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings and thresholds. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market.

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the six months ended June 30, 2019 or 2018. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income and (expenses) in the consolidated financial statements.

Our non-recourse debt, net which we have classified as Level 3, had a carrying value of $832.7 million and $833.8 million at June 30, 2019 and December 31, 2018, respectively, and an estimated fair value of $833.4 million and $825.8 million at June 30, 2019 and December 31, 2018, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both June 30, 2019 and December 31, 2018.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. We did not recognize any impairment charges during the three or six months ended June 30, 2019 or 2018.

Note 7. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities.


CWI 2 6/30/2019 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive (loss) income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated as Hedging Instruments 
 
 
 
Asset Derivatives Fair Value at
 
Balance Sheet Location
 
June 30, 2019
 
December 31, 2018
Interest rate swap
 
Other assets
 
$
432

 
$
1,368

Interest rate caps
 
Other assets
 
4

 
57

 
 
 
 
$
436

 
$
1,425


All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both June 30, 2019 and December 31, 2018, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized losses of $0.2 million and unrealized gains of $0.2 million in Other comprehensive (loss) income on derivatives in connection with our interest rate swap and caps during the three months ended June 30, 2019 and 2018, respectively, and unrealized losses of $0.4 million and unrealized gains of $1.1 million during the six months ended June 30, 2019 and 2018, respectively.

We reclassified $0.3 million and $0.2 million from Other comprehensive (loss) income on derivatives into Interest expense during the three months ended June 30, 2019 and 2018, respectively, and $0.6 million and $0.2 million during the six months ended June 30, 2019 and 2018, respectively, with the reclassifications resulting in a decrease to interest expense during both the three and six months ended June 30, 2019 and 2018.

Amounts reported in Other comprehensive (loss) income related to our interest rate swap and caps will be reclassified to Interest expense as interest expense or income is incurred on our variable-rate debt. At June 30, 2019, we estimated that $0.4 million will be reclassified as Interest income during the next 12 months related to our interest rate swap and caps.

Interest Rate Swap and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swap and caps that we had outstanding on our Consolidated Hotels at June 30, 2019 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 
Notional
 
Fair Value at
Interest Rate Derivatives
 
Instruments
 
Amount
 
June 30, 2019
Interest rate swap
 
1

 
$
99,050

 
$
432

Interest rate caps
 
6

 
297,500

 
4

 
 
 
 
 
 
$
436



CWI 2 6/30/2019 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of June 30, 2019. At June 30, 2019, both our total credit exposure and the maximum exposure to any single counterparty was $0.5 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At June 30, 2019, we had not been declared in default on any of our derivative obligations. At both June 30, 2019 and December 31, 2018, we had no derivatives that were in a net liability position.

Note 8. Debt

Our debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
Current
 
Carrying Amount at
Consolidated Hotels
 
Interest Rate
 
Rate Type
 
Maturity Date
 
June 30, 2019
 
December 31, 2018
San Jose Marriott (a) (b) (c)
 
5.19%
 
Variable
 
7/2019
 
$
87,993

 
$
87,880

Marriott Sawgrass Golf Resort & Spa (a)
 
6.29%
 
Variable
 
11/2019
 
77,999

 
77,997

Seattle Marriott Bellevue (a) (d)
 
3.88%
 
Variable
 
1/2020
 
98,902

 
99,719

Le Méridien Arlington (a) (d)
 
5.19%
 
Variable
 
6/2020
 
34,859

 
34,787

Renaissance Atlanta Midtown Hotel (a) (b)
 
4.66%
 
Variable
 
8/2021
 
48,460

 
48,332

Ritz-Carlton San Francisco
 
4.59%
 
Fixed
 
2/2022
 
142,905

 
142,887

Charlotte Marriott City Center
 
4.53%
 
Fixed
 
6/2022
 
102,562

 
102,488

Courtyard Nashville Downtown
 
4.15%
 
Fixed
 
9/2022
 
55,166

 
55,051

Embassy Suites by Hilton Denver-Downtown/Convention Center
 
3.90%
 
Fixed
 
12/2022
 
98,954

 
99,818

San Diego Marriott La Jolla
 
4.13%
 
Fixed
 
8/2023
 
84,890

 
84,877

 
 
 
 
 
 
 
 
$
832,690

 
$
833,836

___________
(a)
These mortgage loans have variable interest rates, which have effectively been capped or converted to fixed rates through the use of interest rate caps or swaps (Note 7). The interest rates presented for these mortgage loans reflect the rates in effect at June 30, 2019 through the use of an interest rate cap or swap, as applicable.
(b)
These mortgage loans have two one-year extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.
(c)
On July 12, 2019, we exercised the first of our two one-year extension options, which extends the maturity date of the loan to July 12, 2020.
(d)
These mortgage loans have one-year extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension option.

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and could be triggered by the lender under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a lender requires that we enter into a cash management agreement, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. At June 30, 2019, we were in compliance with the applicable covenants for each of our mortgage loans.


CWI 2 6/30/2019 10-Q 17


Notes to Consolidated Financial Statements (Unaudited)

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2019 and each of the next four calendar years following December 31, 2019 are as follows (in thousands):
Years Ending December 31,
 
Total
2019 (remainder)
 
$
169,058

2020
 
137,056

2021
 
53,498

2022
 
395,710

2023
 
79,740

Total principal payments
 
835,062

Unamortized deferred financing costs
 
(2,372
)
Total
 
$
832,690


Note 9. Commitments and Contingencies

At June 30, 2019, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Hotel Management Agreements

As of June 30, 2019, our Consolidated Hotel properties were operated pursuant to long-term management agreements with three different management companies, with initial terms ranging from five to 40 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 2.5% to 3.0% of hotel revenues. Six of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee generally ranging from 3.0% to 7.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $3.3 million and $3.6 million for the three months ended June 30, 2019 and 2018, respectively, and $6.8 million and $6.7 million for the six months ended June 30, 2019 and 2018, respectively.

Franchise Agreements

Four of our Consolidated Hotels operate under franchise or license agreements with national brands that are separate from our management agreements. As of June 30, 2019, we had three franchise agreements with Marriott-owned brands and one with a Hilton-owned brand related to our Consolidated Hotels. Our typical franchise agreement provides for a term of 20 to 25 years. Generally, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $1.4 million and $1.5 million for the three months ended June 30, 2019 and 2018, respectively, and $2.8 million and $2.9 million for the six months ended June 30, 2019 and 2018, respectively.


CWI 2 6/30/2019 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3% and 5% of the respective hotel’s total gross revenue. At June 30, 2019 and December 31, 2018$24.6 million and $20.4 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures and is included in Restricted cash in the consolidated financial statements.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. At June 30, 2019, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts at June 30, 2019 totaled $13.4 million. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources, proceeds available under our Working Capital Facility and/or other sources of available capital, including cash flow from operations.

Note 10. Income Per Share and Equity

Income Per Share

The following table presents income per share (in thousands, except share and per share amounts):
 
Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
Basic and Diluted Weighted-Average
Shares Outstanding 
 
Allocation of Income
 
Basic and Diluted Income
Per Share 
 
Basic and Diluted Weighted-Average
Shares Outstanding 
 
Allocation of Income
 
Basic and Diluted Income Per Share 
Class A common stock
31,805,101

 
$
370

 
$
0.01

 
30,189,278

 
$
1,104

 
$
0.04

Class T common stock
59,872,699

 
589

 
0.01

 
58,758,378

 
1,981

 
0.03

Net income attributable to CWI 2 stockholders
 
 
$
959

 
 
 
 
 
$
3,085

 
 

 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
Basic and Diluted Weighted-Average
Shares Outstanding 
 
Allocation of Income
 
Basic and Diluted Income
Per Share 
 
Basic and Diluted Weighted-Average
Shares Outstanding 
 
Allocation of Income
 
Basic and Diluted Income Per Share 
Class A common stock
31,599,698

 
$
768

 
$
0.02

 
30,006,248

 
$
648

 
$
0.02

Class T common stock
59,687,602

 
1,215

 
0.02

 
58,570,885

 
941

 
0.02

Net income attributable to CWI 2 stockholders
 
 
$
1,983

 
 
 
 
 
$
1,589

 
 

The allocation of net income attributable to CWI 2 stockholders is calculated based on the weighted-average shares outstanding for Class A common stock and Class T common stock for the period. The allocation for the Class A common stock excludes the accretion of interest on the annual distribution and shareholder servicing fee of $0.1 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively, and $0.2 million and $0.3 million for the six months ended June 30, 2019 and 2018, respectively, since this fee is only applicable to holders of Class T common stock.


CWI 2 6/30/2019 10-Q 19


Notes to Consolidated Financial Statements (Unaudited)

The distribution and shareholder servicing fee is 1.0% of the NAV of our Class T common stock; it accrues daily and is payable quarterly in arrears. We will no longer incur the distribution and shareholder servicing fee after July 31, 2023, although the fees may end sooner if the total underwriting compensation paid in respect of the offering reaches 10.0% of the gross offering proceeds or if we undertake a liquidity event, as described in our prospectus, before that date. We paid distribution and shareholder servicing fees to selected dealers of $1.4 million during both the three months ended June 30, 2019 and 2018 and $2.8 million and $2.9 million during the six months ended June 30, 2019 and 2018, respectively.

Reclassifications Out of Accumulated Other Comprehensive Income

The following table presents a reconciliation of changes in Accumulated other comprehensive income by component for the periods presented (in thousands):
 
 
Three Months Ended June 30,
Gains and Losses on Derivative Instruments
 
2019
 
2018
Beginning balance
 
$
671

 
$
2,155

Other comprehensive (loss) income before reclassifications
 
(220
)
 
207

Amounts reclassified from accumulated other comprehensive income to:
 
 
 
 
Interest expense
 
(293
)
 
(162
)
Equity in losses of equity method investments in real estate
 
5

 

        Total
 
(288
)
 
(162
)
Net current period other comprehensive (loss) income
 
(508
)
 
45

Net current period other comprehensive (income) loss attributable to noncontrolling interests
 
(2
)