Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20172018
OR
¨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: 001-34693
 
CHATHAM LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland 27-1200777
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
   
222 Lakeview Avenue, Suite 200  
West Palm Beach, Florida 33401
(Address of Principal Executive Offices) (Zip Code)
(561) 802-4477
(Registrant’s Telephone Number, Including Area Code)
 
 
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.    x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer¨
    
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company¨
  Emerging growth company¨
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
ClassOutstanding at August 2, 20171, 2018
Common Shares of Beneficial Interest ($0.01 par value per share)39,236,39745,879,109

TABLE OF CONTENTS
  Page
  
   
Item 1.
Item 2.
Item 3.
Item 4.
   
  
   
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CHATHAM LODGING TRUST
Consolidated Balance Sheets
(In thousands, except share and per share data)
 
June 30,
2017
 December 31,
2016
June 30,
2018
 December 31,
2017
(unaudited)  (unaudited)  
Assets:      
Investment in hotel properties, net$1,215,677
 $1,233,094
$1,308,571
 $1,320,082
Cash and cash equivalents12,794
 12,118
8,077
 9,333
Restricted cash25,025
 25,083
27,881
 27,166
Investment in unconsolidated real estate entities25,345
 20,424
22,776
 24,389
Hotel receivables (net of allowance for doubtful accounts of $234 and $155, respectively)7,277
 4,389
Hotel receivables (net of allowance for doubtful accounts of $234 and $200, respectively)6,976
 4,047
Deferred costs, net4,263
 4,642
5,351
 4,646
Prepaid expenses and other assets5,103
 2,778
4,439
 2,523
Deferred tax asset, net
 426
30
 30
Total assets$1,295,484
 $1,302,954
$1,384,101
 $1,392,216
Liabilities and Equity:      
Mortgage debt, net$528,077
 $530,323
$504,072
 $506,316
Revolving credit facility45,000
 52,500
27,000
 32,000
Accounts payable and accrued expenses27,823
 27,782
31,358
 31,692
Distributions and losses in excess of investments of unconsolidated real estate entities5,780
 6,017
7,562
 6,582
Distributions payable5,035
 4,742
5,431
 5,846
Total liabilities611,715
 621,364
575,423
 582,436
Commitments and contingencies (Note 12)

 

Commitments and contingencies (Note 11)

 

Equity:      
Shareholders’ Equity:      
Preferred shares, $0.01 par value, 100,000,000 shares authorized and unissued at June 30, 2017 and December 31, 2016
 
Common shares, $0.01 par value, 500,000,000 shares authorized; 39,225,717 and 38,367,014 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively388
 380
Preferred shares, $0.01 par value, 100,000,000 shares authorized and unissued at June 30, 2018 and December 31, 2017
 
Common shares, $0.01 par value, 500,000,000 shares authorized; 45,876,812 and 45,375,266 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively459
 450
Additional paid-in capital739,476
 722,019
882,752
 871,730
Retained earnings (distributions in excess of retained earnings)(61,474) (45,657)(83,079) (69,018)
Total shareholders’ equity678,390
 676,742
800,132
 803,162
Noncontrolling Interests:      
Noncontrolling interest in Operating Partnership5,379
 4,848
8,546
 6,618
Total equity683,769
 681,590
808,678
 809,780
Total liabilities and equity$1,295,484
 $1,302,954
$1,384,101
 $1,392,216
The accompanying notes are an integral part of these consolidated financial statements.

CHATHAM LODGING TRUST
Consolidated Statements of Operations
(In thousands, except share and per share data)
(unaudited)
For the three months endedFor the six months endedFor the three months ended For the six months ended
June 30,June 30, June 30,
2017 20162017 20162018 2017 2018 2017
Revenue:            
Room$72,801
 $72,768
$137,194
 $136,702
$78,274
 $72,801
 $144,525
 $137,194
Food and beverage1,473
 1,726
2,975
 3,234
2,212
 1,473
 4,310
 2,975
Other2,967
 2,637
5,413
 4,990
3,527
 2,967
 6,554
 5,413
Cost reimbursements from unconsolidated real estate entities668
 870
1,549
 1,924
2,577
 2,402
 5,234
 4,896
Total revenue77,909
 78,001
147,131
 146,850
86,590
 79,643
 160,623
 150,478
Expenses:            
Hotel operating expenses:            
Room15,024
 14,574
28,529
 28,385
15,945
 15,024
 30,499
 28,529
Food and beverage1,212
 1,245
2,464
 2,423
1,739
 1,212
 3,479
 2,464
Telephone387
 430
795
 851
415
 387
 874
 795
Other hotel operating710
 638
1,310
 1,227
796
 710
 1,517
 1,310
General and administrative5,974
 5,700
11,628
 11,196
6,781
 5,974
 12,814
 11,628
Franchise and marketing fees6,089
 5,948
11,391
 11,136
6,575
 6,089
 12,100
 11,391
Advertising and promotions1,270
 1,344
2,602
 2,696
1,485
 1,270
 3,050
 2,602
Utilities2,352
 2,235
4,722
 4,617
2,446
 2,352
 5,146
 4,722
Repairs and maintenance3,179
 3,158
6,431
 6,359
3,637
 3,179
 7,261
 6,431
Management fees2,588
 2,384
4,835
 4,613
2,807
 2,588
 5,243
 4,835
Insurance295
 338
628
 675
339
 295
 672
 628
Total hotel operating expenses39,080
 37,994
75,335
 74,178
42,965
 39,080
 82,655
 75,335
Depreciation and amortization11,714
 12,281
23,718
 24,756
11,921
 11,714
 23,958
 23,718
Impairment loss6,663
 
6,663
 

 6,663
 
 6,663
Property taxes, ground rent and insurance5,573
 5,014
10,361
 10,037
6,180
 5,573
 11,955
 10,361
General and administrative3,287
 2,972
6,555
 6,084
3,547
 3,287
 7,169
 6,555
Hotel property acquisition costs and other charges15
 298
15
 310
Other charges264
 15
 250
 15
Reimbursed costs from unconsolidated real estate entities668
 870
1,549
 1,924
2,577
 2,402
 5,234
 4,896
Total operating expenses67,000
 59,429
124,196
 117,289
67,454
 68,734
 131,221
 127,543
Operating income10,909
 18,572
22,935
 29,561
19,136
 10,909
 29,402
 22,935
Interest and other income6
 15
18
 36
15
 6
 17
 18
Interest expense, including amortization of deferred fees(6,773) (7,092)(13,765) (14,129)(6,667) (6,773) (13,298) (13,765)
Loss on early extinguishment of debt
 

 (4)
Loss on sale of hotel property(1) 
 (18) 
Income from unconsolidated real estate entities927
 942
842
 295
1,004
 927
 250
 842
Loss on sale from unconsolidated real estate entities
 (8)
 (8)
Income before income tax expense5,069
 12,429
10,030
 15,751
13,487
 5,069
 16,353
 10,030
Income tax expense
 (179)(317) (179)
 
 
 (317)
Net income5,069
 12,250
9,713
 15,572
13,487
 5,069
 16,353
 9,713
Net income attributable to noncontrolling interests(35) (82)(66) (104)(100) (35) (120) (66)
Net income attributable to common shareholders$5,034
 $12,168
$9,647
 $15,468
$13,387
 $5,034
 $16,233
 $9,647
            
Income per Common Share - Basic:            
Net income attributable to common shareholders (Note 10)$0.13
 $0.32
$0.25
 $0.40
Net income attributable to common shareholders (Note 9)$0.29
 $0.13
 $0.35
 $0.25
Income per Common Share - Diluted:            
Net income attributable to common shareholders (Note 10)$0.13
 $0.31
$0.25
 $0.40
Net income attributable to common shareholders (Note 9)$0.29
 $0.13
 $0.35
 $0.25
Weighted average number of common shares outstanding:            
Basic38,525,306
 38,299,132
38,443,663
 38,286,790
45,867,625
 38,525,306
 45,811,023
 38,443,663
Diluted38,749,661
 38,477,212
38,659,189
 38,446,918
46,084,688
 38,749,661
 46,006,561
 38,659,189
Distributions declared per common share:$0.33
 $0.33
$0.66
 $0.64
$0.33
 $0.33
 $0.66
 $0.66
The accompanying notes are an integral part of these consolidated financial statements.

CHATHAM LODGING TRUST
Consolidated Statements of Equity
(In thousands, except share and per share data)
(unaudited)
 
Common Shares 
Additional
Paid - In
Capital
 Retained earnings (distributions in excess of retained earnings) 
Total
Shareholders’
Equity
 
Noncontrolling
Interest in
Operating
Partnership
 
Total
Equity
Common Shares 
Additional
Paid - In
Capital
 Retained earnings (distributions in excess of retained earnings) 
Total
Shareholders’
Equity
 
Noncontrolling
Interest in
Operating
Partnership
 
Total
Equity
Shares Amount Shares Amount 
Balance, January 1, 201638,308,937
 $379
 $719,773
 $(27,281) $692,871
 $4,131
 $697,002
Issuance of shares pursuant to Equity Incentive Plan34,339
 
 550
 
 550
 
 550
Issuance of shares, net of offering costs of $19,278
 1
 191
 
 192
 
 192
Amortization of share based compensation
 
 646
 
 646
 598
 1,244
Dividends declared on common shares ($0.64 per share)
 
 
 (24,586) (24,586) 
 (24,586)
Distributions declared on LTIP units ($0.64 per unit)
 
 
 
 
 (354) (354)
Reallocation of noncontrolling interest
 
 11
 
 11
 (11) 
Net income
 
 
 15,468
 15,468
 104
 15,572
Balance, June 30, 201638,352,554
 $380
 $721,171
 $(36,399) $685,152
 $4,468
 $689,620
Balance, January 1, 201738,367,014
 $380
 $722,019
 $(45,657) $676,742
 $4,848
 $681,590
38,367,014
 $380
 $722,019
 $(45,657) $676,742
 $4,848
 $681,590
Issuance of shares pursuant to Equity Incentive Plan23,980
 
 500
 
 500
 
 500
23,980
 
 500
 
 500
 
 500
Issuance of shares, net of offering costs of $512829,723
 8
 16,351
 
 16,359
 
 16,359
829,723
 8
 16,351
 
 16,359
 
 16,359
Issuance of restricted time-based shares5,000
 
 
 
 
 
 
5,000
 
 
 
 
 
 
Amortization of share based compensation
 
 421
 
 421
 1,115
 1,536

 
 421
 
 421
 1,115
 1,536
Dividends declared on common shares ($0.66 per share)
 
 
 (25,464) (25,464) 
 (25,464)
 
 
 (25,464) (25,464) 
 (25,464)
Distributions declared on LTIP units ($0.66 per unit)
 
 
 
 
 (465) (465)
 
 
 
 
 (465) (465)
Reallocation of noncontrolling interest
 
 185
 
 185
 (185) 

 
 185
 
 185
 (185) 
Net income
 
 
 9,647
 9,647
 66
 9,713

 
 
 9,647
 9,647
 66
 9,713
Balance, June 30, 201739,225,717
 $388
 $739,476
 $(61,474) $678,390
 $5,379
 $683,769
39,225,717
 $388
 $739,476
 $(61,474) $678,390
 $5,379
 $683,769
Balance, January 1, 201845,375,266
 $450
 $871,730
 $(69,018) $803,162
 $6,618
 $809,780
Issuance of shares pursuant to Equity Incentive Plan21,670
 
 500
 
 500
 
 500
Issuance of shares, net of offering costs of $257479,876
 9
 10,416
 
 10,425
 
 10,425
Amortization of share based compensation
 
 86
 
 86
 1,777
 1,863
Dividends declared on common shares ($0.66 per share)
 
 
 (30,294) (30,294) 
 (30,294)
Distributions declared on LTIP units ($0.66 per unit)
 
 
 
 
 (601) (601)
Forfeited distributions declared on LTIP units
 
 
 
 
 652
 652
Reallocation of noncontrolling interest
 
 20
 
 20
 (20) 
Net income
 
 
 16,233
 16,233
 120
 16,353
Balance, June 30, 201845,876,812
 $459
 $882,752
 $(83,079) $800,132
 $8,546
 $808,678
The accompanying notes are an integral part of these consolidated financial statements.

CHATHAM LODGING TRUST
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
For the six months endedFor the six months ended
June 30,June 30,
2017 20162018 2017
Cash flows from operating activities:      
Net income$9,713
 $15,572
$16,353
 $9,713
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation23,611
 24,649
23,841
 23,611
Amortization of deferred franchise fees107
 107
117
 107
Amortization of deferred financing fees included in interest expense141
 548
459
 141
Impairment loss6,663
 

 6,663
Loss on early extinguishment of debt
 4
Share based compensation1,786
 1,495
2,114
 1,786
Income from unconsolidated real estate entities(842) (295)(250) (842)
Changes in assets and liabilities:      
Hotel receivables(2,887) (1,850)(2,929) (2,887)
Deferred tax asset426
 

 426
Deferred costs(44) (94)(147) (44)
Prepaid expenses and other assets(2,349) (426)(1,937) (2,349)
Accounts payable and accrued expenses321
 (98)366
 321
Net cash provided by operating activities36,646
 39,612
37,987
 36,646
Cash flows from investing activities:      
Improvements and additions to hotel properties(12,865) (11,774)(12,760) (12,865)
Distributions from unconsolidated entities719
 4,069
2,843
 719
Investment in unconsolidated real estate entities(5,037) 

 (5,037)
Restricted cash58
 (3,235)
Net cash used in investing activities(17,125) (10,940)(9,917) (17,183)
Cash flows from financing activities:      
Borrowings on revolving credit facility24,000
 24,450
59,000
 24,000
Repayments on revolving credit facility(31,500) (23,750)(64,000) (31,500)
Payments on mortgage debt(2,070) (1,784)(2,425) (2,070)
Principal prepayment of mortgage debt
 (5,954)
Payment of financing costs
 (50)(953) 
Payment of offering costs(512) (1)(257) (512)
Proceeds from issuance of common shares16,871
 192
10,681
 16,871
Distributions-common shares/units(25,634) (27,503)(30,657) (25,634)
Net cash used in financing activities(18,845) (34,400)(28,611) (18,845)
Net change in cash and cash equivalents676
 (5,728)
Cash and cash equivalents, beginning of period12,118
 21,036
Cash and cash equivalents, end of period$12,794
 $15,308
Net change in cash, cash equivalents and restricted cash(541) 618
Cash, cash equivalents and restricted cash, beginning of period36,499
 37,201
Cash, cash equivalents and restricted cash, end of period$35,958
 $37,819
Supplemental disclosure of cash flow information:      
Cash paid for interest$13,297
 $13,486
$12,549
 $13,297
Cash paid for income taxes$294
 $485
$733
 $294
-continued-
Supplemental disclosure of non-cash investing and financing information:
On January 15,16, 2018, the Company issued 21,670 shares to its independent trustees pursuant to the Company’s Equity Incentive Plan as compensation for services performed in 2017. On January 16, 2017, the Company issued 23,980 shares to its independent trustees pursuant to the Company’s Equity Incentive Plan as compensation for services performed in 2016. On January 15, 2016,
As of June 30, 2018, the Company issuedhad accrued distributions payable of 26,488$5,431. These distributions were paid on July 27, 2018, except for $308 related to accrued but unpaid distributions on unvested performance based shares to its independent trustees pursuant to the Company’s Equity Incentive Plan as compensation for services performed in 2015.
and LTIP units. As of June 30, 2017, the Company had accrued distributions payable of $5,035. These distributions were paid on July 28, 2017, except for $669 related to accrued but unpaid distributions on unvested performance based shares and LTIP units (See Note 11). As of June 30, 2016, the Company had accrued distributions payable of $4,658. These distributions were paid on July 29, 2016, except for $400 related to accrued but unpaid distributions on unvested performance based shares.
Accrued share based compensation of $250 and $250 is included in accounts payable and accrued expenses as of June 30, 20172018 and 20162017, respectively.
Accrued capital improvements of $1,9211,933 and $2,9181,921 are included in accounts payable and accrued expenses as of June 30, 20172018 and 20162017, respectively.

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

CHATHAM LODGING TRUST
Notes to the Consolidated Financial Statements
(in thousands, except share and per share data, unless otherwise specified)
(unaudited)
 
1.    Organization

Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment trust (“REIT”) on October 26, 2009. The Company is internally-managed and invests primarily in upscale extended-stay and premium-branded select-service hotels.
In January 2014, the Company established an At the Market Equity Offering ("Prior ATM Plan") whereby, from time to time, we may publicly offer and sell our common shares having an aggregate maximum offering price of up to $50 million of our common shares by means of ordinary brokers’ transactions on the New York Stock Exchange (the "NYSE"), in negotiated transactions or in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, with Cantor Fitzgerald & Co. ("Cantor") acting as sales agent pursuant to a Sales Agreement (the “Cantor Sales Agreement”).agent. On January 13, 2015, the Company entered into a Sales Agreement (the “Barclays Sales Agreement”)sales agreement with Barclays Capital Inc. (“Barclays”) to add Barclays as an additional sales agent under the Company’s Prior ATM Plan. We filed a $100 million registration statement for a new ATM program (the "ATM Plan" and together with the Prior ATM Plan, the "ATM Plans") on December 28, 2017 to replace the prior program. At the same time, the Company entered into sales agreements with Cantor, Barclays, Robert W. Baird & Co. Incorporated, ("Baird"), Citigroup Global Markets Inc. ("Citigroup"), Stifel, Nicolaus & Company, Incorporated ("Stifel") and Wells Fargo Securities, LLC ("Wells Fargo") as sales agents. During the three months ended June 30, 2017,2018, we issued 647,925no shares under the ATM PlanPlan. As of June 30, 2018, we had issued 2,147,695 shares under the ATM Plans at a weighted average price of $20.43, which generated $12.9 million of net proceeds.$21.87. As of June 30, 2017, we had issued 1,528,745 shares under the ATM Plan at a weighted average price of $22.22. As of June 30, 20172018, there was approximately $16.0$100.0 million available for issuance under the ATM Plan.
In January 2014, the Company established a $25 million dividend reinvestment and stock purchase plan ("(the "Prior DRSPP"). We filed a new $50 million registration statement for the dividend reinvestment and stock purchase plan (the "New DRSPP" and together with the Prior DRSPP, the "DRSPPs") on December 28, 2017 to replace the prior program. Under the DRSPP,DRSPPs, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends received on the Company's common shares. Shareholders may also make optional cash purchases of the Company's common shares subject to certain limitations detailed in the prospectus for the DRSPP. In January 2017, we filed a new $25 million registration statement for the DRSPP to replace the prior existing program.DRSPPs. During the three months ended June 30, 2017,2018, we issued 175,1337,212 shares under the New DRSPP at a weighted average price of $20.12,$20.02, which generated $3.5$0.1 million of netgross proceeds. As of June 30, 20172018, we had issued 211,1311,215,181 shares under the DRSPPDRSPPs at a weighted average price of $20.27.$21.61. As of June 30, 20172018, there was approximately $20.7$39.3 million available for issuance under the New DRSPP.
The net proceeds from any share offerings or issuances are contributed to Chatham Lodging, L.P., our operating partnership (the “Operating Partnership”), in exchange for partnership interests. Substantially all of the Company’s assets are held by, and all operations are conducted through, the Operating Partnership. Chatham Lodging Trust is the sole general partner of the Operating Partnership and owns 100% of the common units of limited partnership interest in the Operating Partnership. Certain of the Company’s executive officers hold vested and unvested long-term incentive plan units in the Operating Partnership ("LTIP units"), which are presented as non-controlling interests on our consolidated balance sheets.
On January 1, 2016, the Company adopted accounting guidance under Accounting Standards Codification (ASC) Topic 810, "Consolidation,” modifying the analysis it must perform to determine whether it should consolidate certain types of legal entities. The guidance does not amend the existing disclosure requirements for variable interest entities ("VIEs") or voting interest model entities.  The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised guidance, the Operating Partnership is a VIE of the Company. As the Operating Partnership is already consolidated in the financial statements of the Company, the identification of this entity as a VIE has no impact on the consolidated financial statements of the Company.  There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption.  In addition, there were no other voting interest entities under prior existing guidance determined to be variable interest entities under the revised guidance.
As of June 30, 20172018, the Company wholly owned 3840 hotels with an aggregate of 5,7126,020 rooms located in 15 states and the District of Columbia. As of June 30, 2017,2018, the Company also (i) held a 10.3% noncontrolling interest in a joint venture (the “NewINK JV”) with affiliates of Colony NorthStar,Capital, Inc. ("CLNS"CLNY"), which was formed in the second quarter of 2014 and acquired 47 hotels comprising an aggregate of 6,097 rooms from a joint venture (the "Innkeepers JV") between the Company and Cerberus Capital Management ("Cerberus") and (ii) held a 10.0%10% noncontrolling interest in a separate joint venture (the "Inland JV") with affiliates of CLNS,CLNY, which was formed in the fourth quarter of 2014 and acquired 48 hotels from Inland American Real Estate Trust, Inc. ("Inland"), comprising an aggregate of 6,4016,402 rooms. We sometimes refer to the NewINK JV and Inland JV collectively as the ("JVs").

To qualify as a REIT, the Company cannot operate the hotels. Therefore, the Operating Partnership and its subsidiaries lease the Company's wholly owned hotels to taxable REIT subsidiary lessees (“TRS Lessees”), which are wholly owned by the Company’s taxable REIT subsidiary (“TRS”) holding company. The Company indirectly (i) owns its 10.3% interest in all of the 47 NewINK JV hotels and (ii) owns its 10% interest in all of the 48 Inland JV hotels through the Operating Partnership. All of the NewINK JV hotels and Inland JV hotels are leased to TRS Lessees, in which the Company indirectly owns noncontrolling interests through its TRS holding company. Each hotel is leased to a TRS Lessee under a percentage lease that provides for rental payments equal to the greater of (i) a fixed base rent amount or (ii) a percentage rent based on hotel revenue. The initial term of each of the TRS leases is 5 years. Lease revenue from each TRS Lessee is eliminated in consolidation.

The TRS Lessees have entered into management agreements with third-party management companies that provide day-to-day management for the hotels. As of June 30, 20172018, Island Hospitality Management LLC (“IHM”), which is 51% owned by Jeffrey H. Fisher, the Company's Chairman, President and Chief Executive Officer, managed all 3840 of the Company’s wholly owned hotels. As of June 30, 20172018, all of the NewINK JV hotels were managed by IHM. As of June 30, 20172018, 34 of the Inland JV hotels were managed by IHM and 14 of the Inland JV hotels were managed by Marriott International, Inc. ("Marriott").

2.    Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. These unaudited consolidated financial statements, in the opinion of management, include all adjustments consisting of normal, recurring adjustments which are considered necessary for a fair statement of the consolidated balance sheets, consolidated statements of operations, consolidated statements of equity, and consolidated statements of cash flows for the periods presented. Interim results are not necessarily indicative of full year performance due to seasonal and other factors, including the timing of the acquisition of hotels.

The consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements prepared in accordance with GAAP, and the related notes thereto as of December 31, 2016,2017, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2017.

Use of Estimates

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

3.    Recently IssuedAdopted Accounting StandardsPolicies

On May 28, 2014,January 1, 2018, the FinancialCompany adopted accounting guidance under Accounting Standards Board ("FASB") issued ASUCodification (ASU) Topic 2014-09, ("ASU 2014-09"), Revenue"Revenue from Contracts with Customers, which requires an entity to recognize the amount ofCustomers" on a modified retrospective basis. Our current revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. Westreams are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The Company is finalizing its evaluation of each of its revenue streamsnot affected under the new model and becausewe did not recognize a cumulative effect adjustment as part of the modified retrospective method of adoption. Furthermore, the new accounting guidance will not materially impact the recognition of or the accounting for disposition of hotels, since we primarily dispose of hotels to third parties in exchange for cash with few contingencies. As it relates to capitalization of costs to acquire customer contracts, the Company has elected to use the Financial Accounting Standards Board's ("FASB") practical expedient which allows us to expense costs to acquire customer contracts as they are incurred due to their short-term day-to-day nature for a specified number of nights that never exceed one year. This guidance applies to all contracts as of the Company's hotel revenues, the pattern of revenue recognition is not expected to change significantly. adoption date.
The Company does not expect adoptionhas applied all relevant disclosures of this standardstandard.

On January 1, 2018, the Company adopted accounting guidance under ASU 2016-15 ("ASU 2016-15"), Classification of Certain Cash Receipts and Cash Payments, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to reduce the current diversity in practice. The Company has certain cash payments and receipts related to debt extinguishment that will havebe affected by the new standard. The company has historically classified distributions received from equity method investments under the cumulative earnings approach. As such, no impact due to application of the new guidance. The Company has applied the new guidance on a material impact on its consolidated financial statements.retrospective basis.


On January 1, 2018, the Company adopted accounting guidance under ASU 2016-18 ("ASU 2016-18"), Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard addresses presentation of restricted cash in the consolidated statements of cash flows only. Restricted cash represents purchase price deposits held in escrow for potential hotel acquisitions under contract and escrow reserves such as reserves for capital expenditures, property taxes or insurance that are required pursuant to the Company's loans. The Company has applied the new guidance on a retrospective basis.

Recently Issued Accounting Standards

On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting for leasing transactions.  This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months.  In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions.  Leases with a term of 12 months or less will be accounted for similarly to existing guidance for operating leases today. The Company is the lessee on certain air/land rights arrangements and an office lease and expects to record right of use assets and lease liabilities for these leases under the new standard. This guidance is effective for the Company on January 1, 2019, however, early adoption is permitted. The standard requires a modified retrospective approach for leases that exist or are entered into afterCompany expects to use FASB's practical expedient which provides the beginning ofCompany the earliestoption to apply the new guidance at its effective date (January 1, 2019) without having to adjust the 2018 and 2017 comparative period in the financial statements. The Company is evaluating the effectimpact that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

On August 26, 2016, the FASB issued ASU 2016-15 ("ASU 2016-15"), Classification of Certain Cash Receipts and Cash Payments, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to reduce the current diversity in practice. This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with earlier adoption permitted. The Company has certain cash payments and receipts related to debt extinguishment and distributions from equity method investments that will be affected by the new standard. The Company does not anticipate that this guidance will have a material impact the adoption of ASU 2016-15 to our consolidated financial statements.

On November 17, 2016, the FASB issued ASU 2016-18 ("ASU 2016-18"), Restricted Cash, which requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This standard will be effective for public companies for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and all other entities for fiscal years beginning after December 15, 2018. The Company does not anticipate that this guidance will have a material impact on our consolidated financial statements.

On January 5, 2017, the FASB issued ASU 2017-01 ("ASU 2017-01"), Definition of a Business, which will likely result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate, pharmaceutical and oil and gas. Application of the changes would also affect the accounting for disposal transactions. This standard will be effective for public business entities with a calendar year end in 2018 and all other entities have an additional year to adopt. The Company does not anticipate that this guidance will have a material impact on our consolidated financial statements.

4.3.    Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts at a level believed to be adequate to absorb estimated probable losses. That estimate is based on past loss experience, current economic and market conditions and other relevant factors. The allowance for doubtful accounts was $0.2 million and $0.2 million as of June 30, 20172018 and December 31, 2016,2017, respectively.

5.4.    Investment in Hotel Properties

Investment in hotel properties as of June 30, 20172018 and December 31, 20162017 consisted of the following (in thousands):
 
June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Land and improvements$274,554
 $274,554
$291,053
 $291,054
Building and improvements1,045,697
 1,045,880
1,146,714
 1,140,477
Furniture, fixtures and equipment53,603
 50,495
65,780
 63,443
Renovations in progress13,309
 10,067
16,998
 13,262
1,387,163
 1,380,996
1,520,545
 1,508,236
Less: accumulated depreciation(171,486) (147,902)(211,974) (188,154)
Investment in hotel properties, net$1,215,677
 $1,233,094
$1,308,571
 $1,320,082
During the three and six monthsyear ended June 30,December 31, 2017, the Company identified indicators of impairment at its Washington PA SHS PA hotel, primarily due to decreased operating performance and continued economic weakness. As such, the Company was required to perform a test of recoverability. This test compared the sum of the estimated future undiscounted cash flow attributable to the hotel over its remaining anticipated holding period and its expected value upon disposition to its disposition.our carrying value for the hotel. The Company determined that the estimated undiscounted future cash flow attributable to the hotelshotel did not exceed theirits carrying value and an impairment existed. As a result, the Company recorded a $6.7 million impairment charge in the consolidated statements of operations during the three and six monthsyear ended June 30,December 31, 2017. Fair value was determined based on a discounted cash flow model using our estimates of future cash flows and third-party market data, considered Level 3 inputs. We may record additional impairment charges if operating results of this hotel are materially different from our forecasts, the economy and lodging industry weakens, or we shorten our contemplated holding period for additional hotels.period. There were no impairments recorded in 2018.

6.5.    Investment in Unconsolidated Entities

 On June 9, 2014, the Company acquired a 10.3% interest in the NewINK JV, a joint venture between affiliates of NorthStar Realty Finance Corp. ("NorthStar") and the Operating Partnership. The Company accounts for this investment under the equity method. NorthStar merged with Colony Capital, Inc. ("Colony") on January 10, 2017 to form a new company, CLNS,CLNY, which owns a 89.7% interest in the NewINK JV. The values of NewINK JV assets and liabilities were adjusted to reflect estimated fair market value at the time Colony merged with NorthStar. As of June 30, 20172018 and 2016,2017, the Company’s share of partners’ capital in the NewINK JV was approximately $53.3$50.2 million and $12.9$53.3 million, respectively, and the total difference between the carrying amount of investment and the Company’s share of partners’ capital was approximately $59.1$57.8 million and $16.6$59.1 million, respectively, (for which the basis difference related to amortizing assets is being recognized over the life of the related assets as a basis difference adjustment). The valueCompany serves as managing member of the NewINK JV assets and liabilities were adjusted to reflect estimated fair market value at the time Colony merged with NorthStar.

JV. During the three and six months ended June 30, 20172018 and 20162017, the Company received cash distributions from the NewINK JV as follows (in thousands):
For the three months ended For the six months endedFor the three months ended For the six months ended
June 30, June 30,June 30, June 30,
2017 2016 2017 20162018 2017 2018 2017
Cash generated from other activities and excess cash$719
 $1,747
 $719
 $2,569
$874
 $719
 $1,593
 $719
Total$719
 $1,747
 $719
 $2,569
$874
 $719
 $1,593
 $719

On November 17, 2014, the Company acquired a 10.0% interest in the Inland JV, a joint venture between affiliates of NorthStar and the Operating Partnership. The Company accounts for this investment under the equity method. NorthStar merged with Colony Capital, Inc. ("Colony") on January 10, 2017 to form a new company, CLNS,CLNY, which owns a 90.0% interest in the Inland JV.  The values of Inland JV assets and liabilities were adjusted to reflect estimated fair market value at the time Colony merged with NorthStar. As of June 30, 20172018 and 2016,2017, the Company's share of partners' capital in the Inland JV was approximately $36.6$33.7 million and $23.1$36.6 million, respectively, and the total difference between the carrying amount of the investment and the Company's share of partners' capital is approximately $11.3$10.9 million and $0.0$11.3 million, respectively (for which the basis difference related to amortizing assets is being recognized over the life of the related assets as a basis difference adjustment).  The value of Inland JV assets and liabilities were adjusted to reflect estimated fair market value at the time Colony merged with NorthStar. The Company serves as managing member of the Inland JV. During the three and six months ended June 30, 20172018 and 2016,2017, the Company received no cash distributions from the Inland JV.JV as follows (in thousands):

 For the three months ended For the six months ended
 June 30, June 30,
 2018 2017 2018 2017
Cash generated from other activities and excess cash$950
 $
 1,250
 $
Total$950
 $
 1,250
 $


On May 9, 2017, the NewINK JV refinanced the $840.0 million loan collateralized by the 47 hotels with a new $850.0 million loan. The new non-recourse loan is with Morgan Stanley Bank, N.A. The new loan bears interest at a rate of LIBOR plus a spread of 2.79%, has an initial maturity of June 7, 2019 and three one-year extension options.

On June 9, 2017, the Inland JV refinanced the $817.0 million loan collateralized by the 48 hotels with a new $780.0 million non-recourse loan with Column Financial, Inc. On June 9, 2017, the Company contributed an additional $5.0 million of capital related to its share in the Inland JV to reduce the debt collateralized by the 48 hotels. The new loan bears interest at a rate of LIBOR plus a spread of 3.3%, has an initial maturity of July 9, 2019 and three one-year extension options.


The Company’s ownership interests in the JVs are subject to change in the event that either the Company or CLNSCLNY calls for additional capital contributions to the respective JVs necessary for the conduct of business, including contributions to fund costs and expenses related to capital expenditures. In connection with (i) the non-recourse mortgage loan secured by the NewINK JV properties and the related non-recourse mezzanine loan secured by the membership interests in the owners of the NewINK JV properties  and (ii)  the non-recourse mortgage loan secured by the Inland JV properties, the Operating Partnership provided the applicable lenders with customary environmental indemnities, as well as  guarantees of certain customary non-recourse carveoutcarve-out provisions such as fraud, material and intentional misrepresentations and misapplication of funds.  In some circumstances, such as the bankruptcy of the applicable borrowers, the guarantees are for the full amount of the outstanding debt, but in most circumstances, the guarantees are capped at 15% of the debt outstanding at the time in question (in the case of the NewINK JV loans) or 20% of the debt outstanding at the time in question (in the case of the Inland JV loans).  In connection with each of the NewINK JV and Inland JV loans, the Operating Partnership has entered into a contribution agreement with its JV partner whereby the JV partner is, in most cases, responsible to cover such JV partner’s pro rata share of any amounts due by the Operating Partnership under the applicable guarantees and environmental indemnities. The Company manages the JVs and will receive a promote interest in each applicable JV if it meets certain return thresholds for such JV. CLNSCLNY may also approve certain actions by the JVs without the Company’s consent, including certain property dispositions conducted at arm’s length, certain actions related to the restructuring of the applicable JV and removal of the Company as managing member in the event the Company fails to fulfill its material obligations under the applicable joint venture agreement.
The Company's investment in the NewINK JV and the Inland JV were $(5.8)$(7.6) million and $25.3$22.8 million, respectively, at June 30, 20172018 and $(6.0)$(6.6) million and $20.4$24.4 million, respectively, at December 31, 2016.2017. The following table sets forth the combined components of net income, (loss), including the Company’s share, related to the NewINK JV and Inland JVall JVs for the three and six months ended June 30, 20172018 and 20162017 (in thousands):

For the three months endedFor the six months endedFor the three months ended For the six months ended
June 30,June 30, June 30,
2017 20162017 20162018 2017 2018 2017
Revenue$130,192
 $130,813
$238,766
 $239,260
$134,888
 $130,192
 $245,062
 $238,766
Total hotel operating expenses81,747
 74,604
156,704
 142,452
83,635
 81,747
 161,659
 156,704
Operating income$48,445
 $56,209
$82,062
 $96,808
$51,253
 $48,445
 $83,403
 $82,062
Net income (loss) from continuing operations$8,075
 $7,769
$562
 $(121)$5,929
 $8,075
 $(5,472) $562
Net income (loss)$8,075
 $7,769
$562
 $(121)$5,929
 $8,075
 $(5,472) $562
            
Income (loss) allocable to the Company$825
 $792
$65
 $(5)$605
 $825
 $(548) $65
Basis difference adjustment102
 150
777
 300
399
 102
 798
 777
Total loss from unconsolidated real estate entities attributable to the Company$927
 $942
$842
 $295
Total income from unconsolidated real estate entities attributable to the Company$1,004
 $927
 $250
 $842


7.6.    Debt

The Company’s mortgage loans are collateralized by first-mortgage liens on certain of the Company’s properties. The mortgages are non-recourse except for instances of fraud or misapplication of funds. Mortgage and senior unsecured revolving credit facility debt consisted of the following (dollars in thousands):
 
Collateral
Interest
Rate
 Maturity Date 6/30/17
Property
Carrying
Value
 Balance Outstanding on Loan as of
Interest
Rate
 Maturity Date 6/30/18
Property
Carrying
Value
 Balance Outstanding on Loan as of
June 30, 2017 December 31,
2016
June 30, 2018 December 31,
2017
Senior Unsecured Revolving Credit Facility (1)
3.35% November 25, 2019 $
 $45,000
 $52,500
3.96% March 8, 2022 $
 $27,000
 $32,000
Residence Inn by Marriott New Rochelle, NY5.75% September 1, 2021 19,612
 13,953
 14,141
5.75% September 1, 2021 18,785
 13,563
 13,762
Residence Inn by Marriott San Diego, CA4.66% February 6, 2023 44,298
 28,749
 29,026
4.66% February 6, 2023 46,524
 28,179
 28,469
Homewood Suites by Hilton San Antonio, TX4.59% February 6, 2023 32,320
 16,415
 16,575
4.59% February 6, 2023 31,647
 16,086
 16,253
Residence Inn by Marriott Vienna, VA4.49% February 6, 2023 30,581
 22,476
 22,699
4.49% February 6, 2023 30,172
 22,017
 22,251
Courtyard by Marriott Houston, TX4.19% May 6, 2023 32,478
 18,568
 18,758
4.19% May 6, 2023 31,999
 18,177
 18,375
Hyatt Place Pittsburgh, PA4.65% July 6, 2023 35,251
 22,652
 22,864
4.65% July 6, 2023 36,066
 22,214
 22,437
Residence Inn by Marriott Bellevue, WA4.97% December 6, 2023 68,314
 45,835
 46,206
4.97% December 6, 2023 66,568
 45,073
 45,462
Residence Inn by Marriott Garden Grove, CA4.79% April 6, 2024 39,400
 33,418
 33,674
4.79% April 6, 2024 37,852
 32,891
 33,160
Residence Inn by Marriott Silicon Valley I, CA4.64% July 1, 2024 81,009
 64,800
 64,800
4.64% July 1, 2024 78,125
 64,800
 64,800
Residence Inn by Marriott Silicon Valley II, CA4.64% July 1, 2024 88,655
 70,700
 70,700
4.64% July 1, 2024 85,477
 70,700
 70,700
Residence Inn by Marriott San Mateo, CA4.64% July 1, 2024 63,962
 48,600
 48,600
4.64% July 1, 2024 61,958
 48,600
 48,600
Residence Inn by Marriott Mountain View, CA4.64% July 6, 2024 56,007
 37,900
 37,900
4.64% July 6, 2024 56,267
 37,900
 37,900
SpringHill Suites by Marriott Savannah, GA4.62% July 6, 2024 36,906
 30,000
 30,000
4.62% July 6, 2024 35,942
 30,000
 30,000
Hilton Garden Inn Marina del Rey, CA4.68% July 6, 2024 42,461
 21,953
 22,145
4.68% July 6, 2024 41,297
 21,559
 21,760
Homewood Suites by Hilton Billerica, MA4.32% December 6, 2024 11,454
 16,225
 16,225
4.32% December 6, 2024 14,798
 16,095
 16,225
Homewood Suites by Hilton Carlsbad CA4.32% December 6, 2024 29,440
 19,950
 19,950
Hampton Inn & Suites Houston Medical Center, TX4.25% January 6, 2025 15,061
 18,300
 18,300
4.25% January 6, 2025 14,879
 18,175
 18,300
              
Total debt before unamortized debt issue costs  $727,209
 $575,494
 $585,063
  $688,356
 $533,029
 $540,454
Unamortized mortgage debt issue costs    (2,417) (2,240)    (1,957) (2,138)
Total debt outstanding    $573,077
 $582,823
    $531,072
 $538,316
 
(1)The interest rate for the senior unsecured revolving credit facility is variable and based on either LIBOR plus an applicable margin ranging from 1.55% to 2.3%, or prime plus an applicable margin of 0.55% to 1.3%.

At June 30, 20172018 and December 31, 20162017, the Company had $45.0$27.0 million and $52.532.0 million, respectively, of outstanding borrowings under its senior unsecured revolving credit facility. At June 30, 20172018, the maximum borrowing availability under the senior unsecured revolving credit facility was $250.0 million.
The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates. All of the Company's mortgage loans are fixed-rate. Rates take into consideration general market conditions, quality and estimated value of collateral and maturity of debt with similar credit terms and are classified within level 3 of the fair value hierarchy. The estimated fair value of the Company’s fixed rate debt as of June 30, 20172018 and December 31, 20162017 was $537.9$492.0 million and $516.0506.6 million, respectively.
The Company estimates the fair value of its variable rate debt by taking into account general market conditions and the estimated credit terms it could obtain for debt with similar maturity and is classified within level 3 of the fair value hierarchy. As of June 30, 2017,2018, the Company’s only variable rate debt is under its senior unsecured revolving credit facility. The estimated fair value of the Company’s variable rate debt as of June 30, 20172018 and December 31, 20162017 was $45.0$27.0 million and $52.532.0 million, respectively.

As of June 30, 20172018, the Company was in compliance with all of its financial covenants. At June 30, 20172018, the Company’s consolidated fixed charge coverage ratio was 3.303.3 and the bank covenant is 1.5. Future scheduled principal payments of debt obligations as of June 30, 20172018, for the current year and each of the next four calendar years and thereafter are as follows (in thousands):
AmountAmount
2017 (remaining six months)$2,262
20185,374
2018 (remaining six months)$2,610
201952,340
6,992
20209,899
9,536
202122,308
21,945
202210,350
36,954
2023142,509
Thereafter472,961
312,483
Total debt before unamortized debt issue costs$575,494
$533,029
Unamortized mortgage debt issue costs(2,417)(1,957)
Total debt outstanding$573,077
$531,072
8.
7.    Income Taxes

The Company’s TRS is subject to federal and state income taxes.
The components of income tax expense for the following periods are as follows (in thousands):
 
For the three months ended For the six months endedFor the three months ended For the six months ended
June 30, June 30,June 30, June 30,
2017 2016 2017 20162018 2017 2018 2017
Federal$
 $152
 $271
 $152
$
 $
 $
 $271
State
 27
 46
 27

 
 
 46
Tax expense (benefit)$
 $179
 $317
 $179
$
 $
 $
 $317
As of each reporting date, the Company's management considers new evidence, both positive and negative, that could impact management's view with regard to future realization of deferred tax assets. The Company's TRS is expecting increased taxable losses in 2017.2018. As of June 30, 2017 and during the period,2018, the TRS continues to recognize a full valuation allowance equal to 100% of the gross deferred tax assetassets, with the exception of the AMT tax credit, due to the uncertainty of the TRS's ability to utilize these deferred tax assets. Management will continue to monitor the need for a valuation allowance on a quarterly basis.allowance.

9.8.    Dividends Declared and Paid

The Company declared total common share dividends of $0.33 per share and distributions on LTIP units of $0.33 per unit for the three months ended June 30, 20172018 and $0.66 per share and distributions on LTIP units of $0.66 per unit for the six months ended June 30, 2017.2018. The dividends and distributions were as follows:
 
Record
Date
 
Payment
Date
 
Common
share
distribution
amount
 
LTIP
unit
distribution
amount
 
Record
Date
 
Payment
Date
 
Common
share
distribution
amount
 
LTIP
unit
distribution
amount
JanuaryJanuary1/31/2017 2/24/2017 $0.11
 $0.11
January1/31/2018 2/23/2018 $0.11
 $0.11
FebruaryFebruary2/28/2017 3/31/2017 0.11
 0.11
February2/28/2018 3/30/2018 0.11
 0.11
MarchMarch3/31/2017 4/28/2017 0.11
 0.11
March3/29/2018 4/27/2018 0.11
 0.11
1st Quarter 2017 $0.33
 $0.33
1st Quarter 20181st Quarter 2018 $0.33
 $0.33
         
AprilApril4/28/2017 5/26/2017 $0.11
 $0.11
April4/30/2018 5/25/2018 $0.11
 $0.11
MayMay5/26/2017 6/30/2017 0.11
 0.11
May5/31/2018 6/29/2018 0.11
 0.11
JuneJune6/30/2017 7/28/2017 0.11
 $0.11
June6/29/2018 7/27/2018 0.11
 $0.11
2nd Quarter 2017 $0.33
 $0.33
2nd Quarter 20182nd Quarter 2018 $0.33
 $0.33
         
Total 2017 $0.66
 $0.66
Total 2018Total 2018 $0.66
 $0.66


10.9.    Earnings Per Share

The two-class method is used to determine earnings per share because unvested restricted shares and unvested LTIP units are considered to be participating shares. The LTIP units held by the non-controlling interest holders, which may be converted to common shares of beneficial interest, have been excluded from the denominator of the diluted earnings per share calculation as there would be no effect on the amounts since limited partners' share of income or loss would also be added back to net income or loss. Unvested restricted shares, unvested long-term incentive plan units and unvested Class A Performance LTIP units that could potentially dilute basic earnings per share in the future would not be included in the computation of diluted loss per share, for the periods where a loss has been recorded, because they would have been anti-dilutive for the periods presented. The following is a reconciliation of the amounts used in calculating basic and diluted net income per share (in thousands, except share and per share data):
For the three months ended For the six months endedFor the three months ended For the six months ended
June 30, June 30,June 30, June 30,
2017 2016 2017 20162018 2017 2018 2017
Numerator:              
Net income attributable to common shareholders$5,034
 $12,168
 $9,647
 $15,468
$13,387
 $5,034
 $16,233
 $9,647
Dividends paid on unvested shares and units(65) (48) (127) (94)(85) (65) (170) (127)
Undistributed earnings allocated to unvested shares and units
 
 
 

 
 
 
Net income attributable to common shareholders$4,969
 $12,120
 $9,520
 $15,374
$13,302
 $4,969
 $16,063
 $9,520
Denominator:              
Weighted average number of common shares - basic38,525,306
 38,299,132
 38,443,663
 38,286,790
45,867,625
 38,525,306
 45,811,023
 38,443,663
Unvested shares224,355
 178,080
 215,526
 160,128
217,063
 224,355
 195,538
 215,526
Weighted average number of common shares - diluted38,749,661
 38,477,212
 38,659,189
 38,446,918
46,084,688
 38,749,661
 46,006,561
 38,659,189
Basic income per Common Share:              
Net income attributable to common shareholders per weighted average basic common share$0.13
 $0.32
 $0.25
 $0.40
$0.29
 $0.13
 $0.35
 $0.25
Diluted income per Common Share:              
Net income attributable to common shareholders per weighted average diluted common share$0.13
 $0.31
 $0.25
 $0.40
$0.29
 $0.13
 $0.35
 $0.25

11.10.    Equity Incentive Plan

The Company maintains its Equity Incentive Plan to attract and retain independent trustees, executive officers and other key employees and service providers. The plan provides for the grant of options to purchase common shares, share awards, share appreciation rights, performance units and other equity-based awards. The plan was amended and restated as of May 17, 2013 to increase the maximum number of shares available under the plan to 3,000,000 shares. Share awards under this plan generally vest over three years, though compensation for the Company’s independent trustees includes share grants that vest immediately. The Company pays dividends on unvested shares and units, except for performance based shares and outperformance based units, for which dividends on unvested performance based shares and units are not paid until those shares or units vest. Certain awards may provide for accelerated vesting if there is a change in control. In January 20172018 and 2016,2017, the Company issued 23,98021,670 and 26,48823,980 common shares, respectively, to its independent trustees as compensation for services performed in 2017 and 2016, and 2015, respectively. The quantity of shares was calculated based on the average of the closing price for the Company’s common shares on the NYSE for the last ten trading days of 2016. The Company would have distributed 12,319 common shares for services performed in 2017 had this liability classified award been satisfied as of June 30, 2017. As of June 30, 2017,2018, there were 1,871,9421,405,529 common shares available for issuance under the Equity Incentive Plan.
Restricted Share Awards
A summary ofFrom time to time, the Company may award restricted shares granted to executive officers that have not fully vested pursuant tounder the Equity Incentive Plan as of June 30, 2017 is as follows:
Award TypeAward Date Total Shares Granted Vested as of June 30, 2017
2014 Time-based Awards1/31/2014 48,213
 48,213
2014 Performance-based Awards1/31/2014 38,805
 12,935
2015 Time-based Awards1/30/2015 40,161
 26,774
2015 Performance-based Awards1/30/2015 36,144
 
2015 Time-based Awards6/1/2015 8,949
 5,966
2017 Restricted Board Awards1/11/2017 5,000
 
Time-based share awards vest over a three-year period. The performance-based share awards will be issuedcompensation to officers, employees and vest over a three-year period only if and to the extent that long-term performance criteria established by the Board of Trustees are met and the recipient remains employed by the Company through the vesting date.
non-employee trustees. The Company measuresrecognizes compensation expense for time-based share awards based upon the fair market value of its commonrestricted shares at the date of grant. For the performance-based shares granted in 2014 and 2015, compensation expense is based on a valuation of $13.17 and $21.21, respectively, per performance share granted, which takes into account that some or all of the awards may not vest if long-term performance criteria are not met during the vesting period. The 2014 performance-based shares did not meet the vesting criteria for 2015 or 2016 causing those shares not to be eligible for future vesting.
The grant date fair values of the performance-based share awards were determined using a Monte Carlo simulation method with the following assumptions:
Performance Award     Risk Free Interest
Grant Date Volatility Dividend Yield Rate
1/31/2014 27% —% 0.71%
1/30/2015 29% —% 0.84%
Compensation expense is recognized on a straight-line basis over the vesting period and is included in general and administrative expense in the accompanying consolidated statements of operations. The Company pays dividends on unvested time-based restricted shares. Dividends for performance-based shares are accrued and paid annually only if and to the extent that long-term performance criteria established by the Board of Trustees are met and the recipient remains employed by the Companybased on the vesting date.

fair market value of the shares on the date of issuance.
A summary of the Company’s restricted share awards for the six months ended June 30, 20172018 and the year ended December 31, 20162017 is as follows:
Six Months Ended Year EndedSix Months Ended Year Ended
June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Number of
Shares
 
Weighted -
Average  Grant
Date Fair
Value
 
Number of
Shares
 
Weighted -
Average  Grant
Date Fair
Value
Number of
Shares
 
Weighted -
Average  Grant
Date Fair
Value
 
Number of
Shares
 
Weighted -
Average  Grant
Date Fair
Value
Non-vested at beginning of the period110,825
 $22.05
 170,480
 $21.38
57,514
 $23.78
 110,825
 $22.05
Granted5,000
 20.20
 
 

 
 5,000
 20.20
Vested(32,441) 25.77
 (59,655) 20.14
(30,084) 26.24
 (32,441) 25.77
Forfeited(25,870) $13.17
 
 $
(24,096) 21.21
 (25,870) 13.17
Non-vested at end of the period57,514
 $23.78
 110,825
 $22.05
3,334
 $20.20
 57,514
 $23.78
As of June 30, 20172018 and December 31, 20162017, there were $0.50.1 million and $0.90.1 million, respectively, of unrecognized compensation costs related to restricted share awards. As of June 30, 20172018, these costs were expected to be recognized over a weighted–average period of approximately 0.91.5 years. For the three months ended June 30, 20172018 and 20162017, the Company recognized approximately $0.2 million22.3 thousand and $0.30.2 million, respectively, and for the six months ended June 30, 20172018 and 2016,2017, the Company recognized approximately $0.4$0.1 million and $0.6$0.4 million, respectively, of expense related to the restricted share awards. This expense is included in general and administrative expenses in the accompanying consolidated statements of operations.


Long-Term Incentive Plan UnitsAwards

The Company recorded $0.7 million and $0.3 million in compensation expense related to the LTIP units for the three months ended June 30, 2017 and 2016, respectively, and for the six months ended June 30, 2017 and 2016, the Company recognized approximately $1.1 million and $0.6 million, respectively. Asare a special class of June 30, 2017 and December 31, 2016, there was $5.8 million and $2.6 million, respectively, of total unrecognized compensation cost related to LTIP units. This cost is expected to be recognized over approximately 2.3 years, which represents the weighted average remaining vesting period of the LTIP units. Upon the closing of the Company's equity offering on September 30, 2013, the Company determined that a revaluation event occurred, as definedpartnership interests in the Internal Revenue Code of 1986, as amended (the "Code"), and 26,250 LTIP units awarded in 2010 and held by one of the officers of the Company had achieved full parity with the common units of the Operating Partnership with respectwhich may be issued to liquidating distributions and all other purposes. 100%eligible participants for the performance of these units have vested as of June 30, 2017. As of June 4, 2014,services to or for the Company determined that a revaluation event occurred, as defined in the Code, and 231,525 LTIP units awarded in 2010 and held by two other officersbenefit of the Company had achieved full parity withCompany. Under the Equity Incentive Plan, each LTIP unit issued is deemed equivalent to an award of one common units ofshare thereby reducing the Operating Partnership with respect to liquidating distributions and allavailability for other purposes. As of June 30, 2017, 100% of these units have vested. As of June 1, 2017, the Company determined thatequity awards on a revaluation event occurred, as defined in the Code, and 118,791 and 128,859 LTIP units awarded in 2016 and 2017, respectively, and held by six officers of the Company had achieved full parity with the common units of the Operating Partnership with respect to liquidating distributions and all other purposes. As of June 30, 2017, 33% and 0% of these units awarded in 2016 and 2017, respectively, have vested. Accordingly, these LTIP units awarded in 2010, 2016 and 2017 are allocated their pro-rata share of the Company's net income.one-for-one basis.

A summary of the Company's LTIP Unit awards for the six months ended June 30, 20172018 and the year ended December 31, 20162017 is as follows:
Six Months Ended Year EndedSix Months Ended Year Ended
June 30, 2017 December 31, 2016June 30, 2018 December 31, 2017
Number of
Shares
 Weighted -
Average  Grant
Date Fair
Value
 Number of
Shares
 Weighted -
Average  Grant
Date Fair
Value
Number of
Units
 Weighted -
Average  Grant
Date Fair
Value
 Number of
Units
 Weighted -
Average  Grant
Date Fair
Value
Non-vested at beginning of the period295,551
 $14.36
 183,300
 $14.13
482,056
 $16.58
 295,551
 $14.36
Granted223,922
 19.20
 112,251
 14.73
244,917
 16.94
 223,922
 19.20
Vested(37,417) 14.73
 
 
(67,275) 16.42
 (37,417) 14.73
Forfeited(183,300) $14.13
 
 $
Non-vested at end of the period482,056
 $16.58
 295,551
 $14.36
476,398
 $17.15
 482,056
 $16.58
Outperformance Plan LTIP Awards

On June 1, 2015, the Company's Operating Partnership granted 183,300 Class A Performance LTIP units, as recommended by the Compensation Committee of the Board (the “Compensation Committee”), pursuant to a long-term, multi-year performance plan (the “Outperformance Plan”). The awards granted pursuant to the Outperformance Plan are subject to two separate performance measurements, with 60%As of the award (the "Absolute Award") based solely on the Company's total shareholder return ("TSR") (the "Absolute TSR Component") and 40% of the award (the "Relative Award") measured by the Company's TSR (the "Relative TSR Component") relative to the other companies (the "Index Companies") that were constituents of the SNL US REIT Hotel Index (the "Index") during the entire measurement period. Under the Absolute TSR Component, 37.5% of the Absolute Award is earned if the Company achieves a 25% TSR over the measurement period. That percentage increases on a linear basis with the full Absolute Award being earned at a 50% TSR over the measurement period. For TSR performance below 25%, no portion of the Absolute Award will be earned. Under the Relative TSR Component, 37.5% of the Relative Award is earned if the Company is at the 50th percentile of the Index Companies at the end of the measurement period. That percentage increases on a linear basis with the full Relative Award earned if the Company is at the 75th percentile of the Index Companies at the end of the measurement period. If the Company is below the 50th percentile of the Index Companies at the end of the measurement period, no portion of the Relative Award will be earned. Compensation expense is based on an estimated value of $14.13 per Class A Performance LTIP unit, which takes into account that some or all of the awards may not vest if long-term performance criteria are not met during the vesting period. Awards earned under the Outperformance Plan will vest 50% at the end of the three-year measurement period on June 1, 2018, and 25% each on the one-year and two-year anniversaries of the end of the three-year measurement period, or June 1, 2019 and 2020, respectively, and provided that the recipient remains employed by the Company through the vesting dates. In the event of a Change in Control (as defined in the executive officers’ employment agreements), Outperformance Plan awards will be earned contingent upon the attainment of a pro rata TSR hurdle for the Absolute Award and achievement of the relative TSR percentile for the Relative Award based upon the in-place formula and using the Change of Control as the end of measurement period. Vesting continues to apply to awards earned upon a Change of Control, subject to full acceleration upon termination without cause or resignation for good reason within 18 months of the Change of Control. Prior to vesting, holders of Class A Performance LTIP Units will not be entitled to vote their Class A Performance LTIP units. In addition, under the terms of the Class A Performance LTIP units a holder of a Class A Performance LTIP unitdid not meet the required market based Total Shareholder Return ("TSR") measurements and therefore, the accrued dividends and units have been forfeited. The Company will generally (i) be entitledcontinue to receive 10% ofamortize the distributions made on a common unit ofremaining expense related to these awards over the Operating Partnership during the period prior to vesting of such Class A Performance LTIP unit (the “Pre-Vesting Distributions”), (ii) be entitled, upon the vesting of such Class A Performance LTIP unit, to receive a special one-time “catch-up” distribution equalnext two years due to the aggregate amount of distributions that were paid on a common unit during the period prior to vesting of such Class A Performance LTIP unit minus the aggregate amount of Pre-Vesting Distributions paid on such Class A Performance LTIP unit, and (iii) be entitled, following the vesting of such Class A Performance LTIP unit, to receive the same amount of distributions paid on a common unit of the Operating Partnership.awards being market based.
    
Time-Based Equity IncentiveLTIP Awards

On January 28, 2016,March 1, 2018, the Company’s Operating Partnership, upon the recommendation of the Compensation Committee, granted 72,96697,968 time-based LTIP unit awards (the “2016“2018 Time-Based LTIP Unit Award”). The grants were made pursuant to award agreements that provide for time-based vesting.vesting (the "LTIP Unit Time-Based Vesting Agreement").
The 2016 Time-BasedTime-based LTIP Unit Awards will vest ratably on each of January 28, 2017, January 28, 2018 and January 28, 2019 (providedprovided that the recipient remains employed by the Company through the applicable vesting date, subject to acceleration of vesting in the event of the recipient’s death, disability, termination without cause or resignation with good reason, or in the event of a change of control of the Company).Company. Prior to vesting, a holder is entitled to receive distributions on the LTIP Units that comprise the 20162018 Time-Based LTIP Unit Awards. Compensation expense is based on an estimated value of $16.69 per 2016 Time-BasedAwards and the prior year LTIP Unit Award.
On March 1, 2017, the Company's Operating Partnership, upon recommendation of the Compensation Committee, granted 89,574 time-based awards (the "2017 Time-Based LTIP Unit Award"). The grants were made pursuant to the award agreements that provide for time-based vesting.
The 2017 Time-based LTIP Unitunit Awards will vest ratably on each of March 1, 2018, March 1, 2019 and March 1, 2020 (provided that the recipient remains employed by the Company through the applicable vesting date, subject to acceleration of vestingset forth in the event of the recipient’s death, disability, termination without cause or resignation with good reason, or in the event of a change of control of the Companytable above.). Prior to vesting, a holder is entitled to receive distributions on the LTIP Units that comprise the 2017 Time-Based LTIP Unit Awards. Compensation expense is based on an estimated value of $18.53 per 2017 Time-Based LTIP Unit Award.


Performance-Based Equity IncentiveLTIP Awards
On January 28, 2016, the Company’s Operating Partnership, upon the recommendation of the Compensation Committee, also granted 39,285 performance-based LTIP unit awards (the "2016 Performance-Based LTIP Unit Awards"). The grants were made pursuant to award agreements that provide for performance-based vesting. The 2016 Performance-Based LTIP Unit Awards are comprised of Class A Performance LTIP Units that will vest only if and to the extent that (i) the Company achieves certain long-term performance criteria established by the Compensation Committee and (ii) the recipient remains employed by the Company through the applicable vesting date, subject to acceleration of vesting in the event of the recipient’s death, disability, termination without cause or resignation with good reason, or in the event of a change of control of the Company. Compensation expense is based on an estimated value of $11.09 per 2016 Performance-Based LTIP Unit Award, which takes into account that some or all of the awards may not vest if long-term performance criteria are not met during the vesting period.

The 2016 Performance-Based LTIP Unit Awards shall vest based on the following:

(a) The number of Class A Performance LTIP Units that most nearly equals (but does not exceed) one-third of the Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award shall vest on January 28, 2017, if the Total Shareholder Return for the 12-month period beginning January 28, 2016 and ending on January 27, 2017 is 8% or more.

(b) The number of Class A Performance LTIP Units that most nearly equals (but does not exceed) one-third of the Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award shall vest on January 28, 2018, if the Total Shareholder Return for the 12-month period beginning January 28, 2017 and ending on January 27, 2018 is 8% or more.

(c) The number of Class A Performance LTIP Units that most nearly equals (but does not exceed) one-third of the Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award shall vest on January 28, 2019, if the Total Shareholder Return for the 12-month period beginning January 28, 2018 and ending on January 27, 2019 is 8% or more.

(d) All of the Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award (less any Class A Performance LTIP Units that previously vested under paragraphs (a), (b) or (c) above), shall vest on January 28, 2019, if the average Total Shareholder Return for the 36-month period ending on January 27, 2019 is 8% or more.

For purposes of the 2016 Performance-Based LTIP Unit Awards, "Total Shareholder Return" means, with respect to the measurement periods described in paragraphs (a), (b), (c) and (d) above, the total percentage return per common share of the Company based on the closing price of the Company’s common shares on the NYSE on the last trading day immediately preceding the first day of the applicable measurement period compared to the closing price of the Company’s common shares on the NYSE on the last trading day of such measurement period and assuming contemporaneous reinvestment in Company common shares of all dividends and other distributions at the closing price of the Company’s common shares on the date such dividend or other distribution was paid.

On March 1, 2017,2018, the Company's Operating Partnership, upon the recommendation of the Compensation Committee, also granted 134,348146,949 performance-based awards (the "2017"2018 Performance-Based LTIP Unit Awards"). The grants were made pursuant to award agreements that provide for performance-based vesting.have market based vesting conditions. The2017 Performance-Based LTIP Unit Awards are comprised of Class A Performance LTIP Units that will vest only if and to the extent that (i) the Company achieves certain long-term performancemarket based TSR criteria established by the Compensation Committee and (ii) the recipient remains employed by the Company through the vesting date, subject to acceleration of vesting in the event of the recipient’s death, disability, termination without cause or resignation with good reason, or in the event of a change of control of the Company. Compensation expense is based on an estimated value of $19.65$17.02 per 20172018 Performance-Based LTIP Unit Award, which takes into account that some or all of the awards may not vest if long-term performancemarket based TSR criteria are not met during the vesting period.


The 20172018 Performance-Based LTIP Unit Awards may be earned based on the Company’s relative TSR performance for the three-year period beginning on March 1, 20172018 and ending on February 28, 2020.2021. The 20172018 Performance-Based LTIP Unit Awards, if earned, will be paid out between 50% and 150% of target value as follows:


 Relative TSR Hurdles (Percentile)Payout Percentage
Threshold25th50%
Target50th100%
Maximum75th150%

Payouts at performance levels in between the hurdles will be calculated by straight-line interpolation. The TSR hurdles are based on the Company’s performance relative to the average TSR for the companies included in the SNL US Hotel REIT Index. TSR will be calculated to include share price appreciation plus dividends assuming the reinvestment of dividends as calculated by a third-party such as SNL Financial.

The Company will estimateestimated the aggregate compensation cost to be recognized over the service period determined as of the grant date under ASC 718, excluding the effect of estimated forfeitures, and will calculate the value at the grant date based on the probable outcome of the performance conditions.

A holder of a Class A Performance LTIP Unit will generally (i) only be entitled, during the period prior to the vesting of such Class A Performance LTIP Unit, to receive 10% of the distributions made on a common unit of limited partnership interest (“Common Unit”) in the Operating Partnership (the “Pre-Vesting Distributions”), and (ii) be entitled, upon the vesting of such Class A Performance LTIP Unit, to a special one-time “catch-up” distribution equal to the aggregate amount of distributions that were paid on a Common Unit during the period prior to vesting of such Class A Performance LTIP Unit minus the aggregate amount of Pre-Vesting Distributions paid on such Class A Performance LTIP Unit. In addition, prior to the vesting of a Class A Performance LTIP Unit, the holder of such Class A Performance LTIP Unit will not be entitled to vote on such Class A Performance LTIP Unit.

The LTIP units' fair value was determined using a Monte Carlo approach. In determining the discounted value of the LTIP units, the Company considered the inherent uncertainty that the LTIP units would never reach parity with the other common units of the Operating Partnership and thus have an economic value of zero to the grantee. Additional factors considered in reachingestimating the assumptionsvalue of uncertaintyLTIP units included discounts for illiquidity; expectations for future dividends; limited or no operations history as of the date of the grant; significant dependency on the efforts and services of our executive officers and other key members of management to implement the Company's business plan; available acquisition opportunities;risk free interest rates; stock price volatility; and economic environment and market conditions.

The grant date fair valuevalues of the performanceLTIPs and the assumptions used to estimate the values are as follows:

 Grant DateNumber of Units GrantedEstimated Value Per UnitVolatilityDividend YieldRisk Free Interest Rate
Outperformance Plan LTIP Unit Awards6/1/2015183,300$14.1326%4.5%0.95%
2016 Time-Based LTIP Unit Awards1/28/201672,966$16.6928%—%0.79%
2016 Performance-Based LTIP Unit Awards1/28/201639,285$11.0930%5.8%1.13%
2017 Time-Based LTIP Unit Awards3/1/201789,574$18.5324%—%0.92%
2017 Performance-Based LTIP Unit Awards3/1/2017134,348$19.6525%5.8%1.47%
2018 Time-Based LTIP Unit Awards3/1/201897,968$16.8326%—%2.07%
2018 Performance-Based LTIP Unit Awards3/1/2018146,949$17.0226%6.2%2.37%
The Company recorded $1.0 million and $0.7 million in compensation expense related to the LTIP awards were determined using a Monte Carlo simulation method withunits for the following assumptions (based onthree months ended June 30, 2018 and 2017, respectively, and for the three-year risk free U.S. Treasury yieldsix months ended June 30, 2018 and 2017, the Company recognized approximately $1.8 million and $1.1 million, respectively. As of June 30, 2018 and December 31, 2017, there was $6.8 million and $5.8 million, respectively, of total unrecognized compensation cost related to LTIP units. This cost is expected to be recognized over approximately 2.2 years, which represents the measurementweighted average remaining vesting period of the LTIP awards):
 Grant DateVolatilityDividend YieldRisk Free Interest RateDiscount
Outperformance Plan6/1/201526%4.5%0.95%—%
2016 Time-Based LTIP Unit Awards1/28/201628%—%0.79%7.5%
2016 Performance-Based LTIP Unit Awards1/28/201630%5.8%1.13%—%
2017 Time-Based LTIP Unit Awards3/1/201724%—%0.92%7.5%
2017 Performance-Based LTIP Unit Awards3/1/201725%5.8%1.47%—%

units.
12.
11.    Commitments and Contingencies

Litigation

The nature of the operations of the Company's hotels exposes those hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. IHM is currently a defendant in two related class action lawsuits pending in the Santa Clara County Superior Court. The first class action lawsuit was filed on October 21, 2016 under the title Ruffy, et al, v. Island Hospitality Management, LLC, et al. Case No. 16-CV-301473 and the second class action was filed on March 21, 2018 under the title Doonan, et al, v. Island Hospitality Management, LLC, et al. Case No. 18-CV-325187. The class actions relate to hotels operated by IHM in the state of California and owned by affiliates of the Company and the NewINK JV, and/or certain third parties. The complaints allege various wage and hour law violations based on alleged misclassification of certain hotel managerial staff and violation of certain California statutes regarding incorrect information contained on employee paystubs. The plaintiffs seek injunctive relief, money damages, penalties, and interest. None of the potential classes has been certified and we are defending our case vigorously. As of June 30, 2018, included in accounts payable is not presently subject to any material litigation nor,$0.2 million which represents an estimate of the Company’s total exposure to the Company’s knowledge,litigation and is any material litigation threatened againstalso its estimated maximum possible loss that the Company or its properties.

may incur.

Hotel Ground Rent

The Courtyard Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 with an extension option by the Company of up to 12 additional terms of five years each. Monthly payments are determined by the quarterly average room occupancy of the hotel. Rent is currently equal to approximately $8,000$8,400 per month when monthly occupancy is less than 85% and can increase up to approximately $20,000 per month if occupancy is 100%, with minimum rent increased by two and one-half percent (2.5%) on an annual basis.

The Residence Inn Gaslamp hotel is subject to a ground lease with an expiration date of January 31, 2065 with an extension option by the Company of up to three additional terms of ten years each. Monthly payments are currently approximately $40,000$40,300 per month and increase 10% every five years. The hotel is subject to annual supplemental rent payments calculated as 5% of gross revenues during the applicable lease year, minus 12 times the monthly base rent scheduled for the lease year.
The Residence Inn New Rochelle is subject to an air rights lease and garage lease that each expire on December 1, 2104.2104. The lease agreements with the City of New Rochelle cover the space above the parking garage that is occupied by the hotel as well as 128 parking spaces in a parking garage that is attached to the hotel. The annual base rent for the garage lease is the hotel’s proportionate share of the city’s adopted budget for the operations, management and maintenance of the garage and established reserves to fund for the cost of capital repairs. Aggregate rent for 20172018 is approximately $26,000$29,000 per quarter.
The Hilton Garden Inn Marina del Rey hotel is subject to a ground lease with an expiration date of December 31, 2067. Minimum monthly payments are currently approximately $43,000$47,500 per month and a percentage rent payment equal to 5% to 25% of gross income based on the type of income less the minimum rent is due in arrears.
Office Lease
The Company entered into a new corporate office lease in September 2015. The lease is for a term of 11 years and includes a 12-month rent abatement period and certain tenant improvement allowances. The Company has a renewal option of up to two successive terms of five years each. The Company shares the space with related parties and is reimbursed for the pro-rata share of rentable space occupied by the related parties.
Future minimum rental payments under the terms of all non-cancellable operating ground leases and the office lease under which the Company is the lessee are expensed on a straight-line basis regardless of when payments are due. The following is a schedule of the minimum future payments required under the ground, air rights, garages leases and office lease as of June 30, 20172018, for the remainder of 20172018 and for each of the next fourfive calendar years and thereafter (in thousands):
 
Other Leases(1)
 Office Lease
Other Leases(1)
 Office Lease
AmountAmount
2017 (remaining six months)$608
 $380
20181,217
 772
2018 (remaining six months)$635
 $389
20191,220
 792
1,273
 792
20201,267
 812
1,320
 812
20211,273
 832
1,326
 832
20221,276
 853
1,329
 853
20231,332
 873
Thereafter68,178
 3,310
69,225
 2,436
Total$75,039
 $7,751
$76,440
 $6,987

(1) Other leases includes ground, garage and air rights leases at our hotels.

Management Agreements
The management agreements with Concord Hospitality Services Company ("Concord") had an initial ten-year term that would have expired on February 28, 2017. The management agreements with Concord were terminated as of December 31, 2016. The company entered into management agreements with IHM for the hotels previously managed by Concord beginning January 1, 2017.
The management agreements with IHM have an initial term of five years and automatically renew for two five-year periods unless IHM provides written notice to us no later than 90 days prior to the then current term’s expiration date of their intent not to renew. The IHM management agreements provide for early termination at the Company’s option upon sale of any IHM-managed hotel for no termination fee, with six months advance notice. The IHM management agreements may be terminated for cause, including the failure of the managed hotel to meet specified performance levels. Base management fees are calculated as a percentage of the hotel's gross room revenue. If certain financial thresholds are met or exceeded, an incentive management fee is calculated as 10% of the hotel's net operating income less fixed costs, base management fees and a specified return threshold. The incentive management fee is capped at 1% of gross hotel revenues for the applicable calculation.
In addition to entering into agreements with IHM to manage two of the hotels formerly managed by Concord, upon renewal in July 2016, five management agreements related to the Residence Inns were amended to be consistent with the remainder of the hotel portfolio. The updated agreements are summarized as follows:
PropertyCourtyard AltoonaSpringhill Suites WashingtonResidence Inn Garden GroveResidence Inn San DiegoResidence Inn San AntonioResidence Inn ViennaResidence Inn Washington D.C.
        
Original Management Fee4.0%4.0%2.5%2.5%2.5%2.5%2.5%
Amended Management Fee3.0%3.0%3.0%3.0%3.0%3.0%3.0%
Original Monthly Accounting Fee1,211
991
1,000
1,000
1,000
1,000
1,000
Amended Monthly Accounting Fee1,500
1,200
1,200
1,200
1,200
1,200
1,200
Original Monthly Revenue Management Fee






Amended Monthly Revenue Management Fee1,000
1,000
1,000
1,000
1,000
1,000
1,000
The company five renewed management agreements in 2017. The updated agreements are summarized as follows:
PropertyHomewood Suites BillericaHomewood Suites BloomingtonHomewood Suites MaitlandHomewood Suites DallasHomewood Suites BrentwoodHomewood Suites Farmington
       
Renewal Date4/1/2017
4/1/2017
5/1/2017
5/1/2017
6/1/2017
8/1/2017
Original Management Fee2.0%2.0%2.0%2.0%2.0%2.0%
Amended Management Fee3.0%3.0%3.0%3.0%3.0%3.0%
Original Monthly Accounting Fee1,000
1,000
1,000
1,000
1,000
1,000
Amended Monthly Accounting Fee1,200
1,200
1,200
1,200
1,200
1,200
Original Monthly Revenue Management Fee550
550
550
550
550
550
Amended Monthly Revenue Management Fee1,000
1,000
1,000
1,000
1,000
1,000

Management fees totaled approximately $2.6$2.8 million and $2.42.6 million, respectively, for the three months ended June 30, 20172018 and 20162017, respectively, and approximately $4.8$5.2 million and $4.6$4.8 million, respectively, for the six months ended June 30, 20172018 and 2016.2017.
Franchise Agreements
The fees associated with the franchise agreements are calculated on the specified percentage of the hotel's gross room revenue. The Company did not enter into any new franchise agreements during the six months ended June 30, 2017 and 2016, respectively. Franchise and marketing fees totaled approximately $6.1$6.6 million and $5.96.1 million, respectively, for the three months ended June 30, 20172018 and 20162017 and approximately $11.4$12.1 million and $11.1$11.4 million, respectively, for the six months ended June 30, 20172018 and 2016.2017. The expiration term of the agreements range from 10 to 30 years with the weighted average expiration being September 2030.

13.12.    Related Party Transactions

Mr. Fisher owns 51% of IHM. As of June 30, 2017,2018, the Company had hotel management agreements with IHM to manage 38all 40 of its wholly owned hotels. As of June 30, 2017,2018, all 47 hotels owned by the NewINK JV and 34 of the 48 hotels owned by the Inland JV are managed by IHM. Hotel management, revenue management and accounting fees accrued or paid to IHM for the hotels owned by the Company for the three months ended June 30, 2018 and 2017 and 2016 were $2.6$2.8 million and $2.3$2.6 million, respectively, and for the six months ended June 30, 2018 and 2017 and 2016 were $4.4$5.2 million and $3.9$4.8 million, respectively. At June 30, 20172018 and December 31, 2016,2017, the amounts due to IHM were $1.1$1.4 million and $0.9$1.2 million, respectively.
Cost reimbursements from unconsolidated real estate entities revenue represent reimbursements of costs incurred on behalf of the NewINK JV, Inland JV and an entity, Castleblack Owner Holding, LLC ("Castleblack"), which is 97.5% owned by affiliates of CLNSCLNY and 2.5% owned by Mr. Fisher. These costs relate primarily to corporate payroll costs at the NewINK JV and Inland JVJVs where the Company is the employer. As the Company records cost reimbursements based upon costs incurred with no added markup, the revenue and related expense has no impact on the Company’s operating income or net income. Cost reimbursements from the JVs are recorded based upon the occurrence of a reimbursed activity.
Various shared office expenses and rent are paid by the Company and allocated to the NewINK JV, the Inland JV, Castleblack and IHM based on the amount of square footage occupied by each entity. Insurance expense for medical, workers compensation and general liability are paid by the NewINK JV and allocated back to the hotel properties or applicable entity for the three months ended June 30, 2018 and 2017 and 2016 were $1.5$1.8 million and $1.3$1.7 million, respectively, and for the six months ended June 30, 2018 and 2017 and 2016 were $3.0$3.7 million and $3.2$3.4 million, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Dollar amounts presented in this Item 2 are in thousands, except per share data, unless otherwise specified.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. In this report, we use the terms “the Company," “we” or “our” to refer to Chatham Lodging Trust and its consolidated subsidiaries, unless the context indicates otherwise.

Statement Regarding Forward-Looking Information

The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include information about possible or assumed future results of the lodging industry and our business, financial condition, liquidity, results of operations, cash flow and plans and objectives. These statements generally are characterized by the use of the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: local, national and global economic conditions, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in lodging industry fundamentals, increased operating costs, seasonality of the lodging industry, our ability to obtain debt and equity financing on satisfactory terms, changes in interest rates, our ability to identify suitable investments, our ability to close on identified investments and inaccuracies of our accounting estimates. Given these uncertainties, undue reliance should not be placed on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. The forward-looking statements should also be read in light of the risk factors identified in the “Risk Factors” section in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 as updated by the Company's subsequent filings with the SEC under the Exchange Act.

Overview

We are a self-advised hotel investment company organized in October 2009 that commenced operations in April 2010. Our investment strategy is to invest in upscale extended-stay and premium-branded select-service hotels in geographically diverse markets with high barriers to entry near strong demand generators. We may acquire portfolios of hotels or single hotels. We expect that a significant portion of our portfolio will consist of hotels in the upscale extended-stay or select-service categories, including brands such as Homewood Suites by Hilton®, Residence Inn by Marriott®, Hyatt Place®, Courtyard by Marriott®, SpringHill Suites by Marriott®, Hilton Garden Inn by Hilton®, Embassy Suites®, Hampton Inn® and Hampton Inn and Suites®.

The Company's future hotel acquisitions may be funded by issuances of both common and preferred shares or the issuance of partnership interests in our operating partnership, Chatham Lodging, L.P. (the "Operating Partnership"), draw-downs under our senior unsecured revolving credit facility, the incurrence or assumption of debt, available cash, proceeds from dispositions of assets or distributions from our 10.3% investment in a joint venture with affiliates of Colony NorthStar,Capital, Inc. (“CLNS”CLNY”) that owns 47 hotels (the "NewINK JV") or distributions from our 10.0% investment in a joint venture with CLNSCLNY that owns 48 hotels (the "Inland JV" and together with the NewINK JV, the "JVs"). We intend to acquire quality assets at attractive prices and improve their returns through knowledgeable asset management and seasoned, proven hotel management while remaining prudently leveraged.
    
At June 30, 2017,2018, our leverage ratio was 38.8%33.3% based on the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost, including the JV investments. Over the past several years, we have maintained a leverage ratio between the mid-30s and the low 50s to fund our acquisitions and JV investments. As of June 30, 2017,2018, we have total debt of $575.5$533.0 million at an average rate of approximately 4.6%. Accordingly, our debt coverage ratios currently are favorable and, as a result, we are comfortable in this leverage range and believe we have the capacity and flexibility to take advantage of acquisition opportunities as they arise. We intend to continue to fund our investments with a prudent balance of debt and equity.

We are a real estate investment trust (“REIT”) for federal income tax purposes. In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), we cannot operate our hotels. Therefore, our Operating Partnership and its subsidiaries lease our hotel properties to taxable REIT subsidiary lessees (“TRS Lessees”), who in turn engage eligible independent contractors to manage the hotels. Each of the TRS Lessees is treated as a taxable REIT subsidiary for federal income tax purposes and is consolidated within our financial statements for accounting purposes. However, since we control both the Operating Partnership and the TRS Lessees, our principal source of funds on a consolidated basis is from the operations of our hotels. The earnings of the TRS Lessees are subject to taxation as regular C corporations, as defined in the Code, potentially reducing the TRS Lessees’ cash available to pay dividends to us, and therefore our funds from operations and the cash available for distribution to our shareholders.

Financial Condition and Operating Performance Metrics

We measure our financial condition and hotel operating performance by evaluating financial metrics and measures such as:
Revenue Per Available Room (“RevPAR”),
Average Daily Rate (“ADR”),
Occupancy,
Funds From Operations (“FFO”),
Adjusted FFO,
Earnings before interest, taxes, depreciation and amortization (“EBITDA”),
EBITDAre,
Adjusted EBITDA, and
Adjusted Hotel EBITDA

We evaluate the hotels in our portfolio and potential acquisitions using these metrics to determine each hotel’s contribution toward providing income to our shareholders through increases in distributable cash flow and increasing long-term total returns through appreciation in the value of our common shares. RevPAR, ADR and Occupancy are hotel industry measures commonly used to evaluate operating performance. RevPAR, which is calculated as total room revenue divided by total number of available rooms, is an important metric for monitoring hotel operating performance, and more specifically hotel revenue.

“Non-GAAP Financial Measures” herein provides a detailed discussion of our use of FFO, Adjusted FFO, EBITDA, EBITDAre,Adjusted EBITDA and Hotel EBITDA and a reconciliation of FFO, Adjusted FFO, EBITDA, EBITDAre,
Adjusted EBITDA and Adjusted Hotel EBITDA to net income or loss, measurements recognized by generally accepted accounting principles in the United States (“GAAP”).


Results of Operations

Industry Outlook

We believe that the lodging industry’s performance is correlated to the performance of the economy overall, and specifically, key economic indicators such as GDP growth, employment trends, corporate travel and corporate profits. Trends for many of these indicators appear to be moderating.  GDP growth is currently modest, with growth of 1.2% in the first quarter of 2017 and 2.6% in the second quarter of 2017.healthy.  Lodging industry performance is also impacted by room supply growth, which is currently increasing.  Overall U.S. room supply increased 1.6%1.8% in 2016,2017, but supply in the Upscale segment, in which most of our hotels operate, increased by 5.6%6.0% in 2016.  Year to date in 2017 overall U.S. room supply growth was 1.8% and supply growth in the Upscale segment was 6.0%.2017.  Smith Travel Research is projecting U.S. hotel supply growth to increase 2.0% in 2017.2018. Continued supply growth especially when coupled with slowing corporate demand, could negatively impact RevPAR growth. We are currently projecting a 20172018 RevPAR change of -1.0%-1.5% to +1.0%+0.0% as compared to 2016.2017.

Comparison of the three months ended June 30, 20172018 to the three months ended June 30, 20162017

Results of operations for the three months ended June 30, 20172018 include the operating activities of our 3840 wholly owned hotels and our investments in the NewINK JV and Inland JV. We wholly owned 38 hotels at January 1, 2017. Accordingly, the comparisons below are influenced by the fact that we acquired one hotel in Portsmouth, NH on September 20, 2017, one hotel in Summerville, SC on November 15, 2017 and one hotel in Springfield, VA on December 6, 2017. We also sold a hotel in Carlsbad, CA on December 20, 2017.

Revenues

Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned hotels, was as follows for the periods indicated (dollars in thousands):
For the three months ended  For the three months ended  
June 30, 2017 June 30, 2016 % ChangeJune 30, 2018 June 30, 2017 % Change
Room$72,801
 $72,768
  %$78,274
 $72,801
 7.5%
Food and beverage1,473
 1,726
 (14.7)%2,212
 1,473
 50.2%
Other2,967
 2,637
 12.5 %3,527
 2,967
 18.9%
Cost reimbursements from unconsolidated real estate entities668
 870
 (23.2)%2,577
 2,402
 7.3%
Total revenue$77,909
 $78,001
 (0.1)%$86,590
 $79,643
 8.7%
Total revenue was $77.9$86.6 million for the quarter ended June 30, 2017, down $0.12018, up $7.0 million compared to total revenue of $78.0$79.6 million for the corresponding 20162017 period. Total revenue related to the three hotels acquired during 2017 contributed $7.6 million of the increase, while the sale of one hotel in 2017 reduced revenue by $1.9 million. Since all of our hotels are select-service or limited-service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 93.4%90.4% and 93.3%91.4%, respectively, of total revenue for the quarters ended June 30, 20172018 and 2016.2017. Room revenue was $72.8$78.3 million and $72.8 million for the quarters ended June 30, 2018 and 2017, respectively, with $6.6 million of the increase in 2018 attributable to the three hotels acquired during 2017 and 2016, respectively, witha loss of room revenue remaining static comparedattributable to the one hotel sold in 2017 of $1.9 million. At the 37 comparable quarter from 2016.hotels owned by the Company throughout the 2017 and 2018 periods, room revenue was up $0.8 million or 1.0%, driven primarily by RevPAR increase of 0.9%.
Food and beverage revenue was $1.5$2.2 million for the quarter ended June 30, 2017, down $0.32018, up $0.7 million compared to $1.7$1.5 million for the corresponding 2016 period2017 period. Food and beverage revenue related to the hotels acquired in part due to lower occupancy for2017 contributed $0.7 million of the quarter.increase.
Other operating revenue, comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue, was up $0.3$0.5 million for the three months ended June 30, 2017.2018. Other operating revenue was $3.0$3.5 million and $2.6$3.0 million for the quarters ended June 30, 2018 and 2017, and 2016, respectively. Increases wereThe increase related to the hotels acquired in 2017 contributed $0.3 million of the increase. The increase was primarily due to increases in guaranteed no show bookings, restaurant lease incomeparking and an insurance settlement.miscellaneous room income.

Cost reimbursements from unconsolidated real estate entities, comprised of payroll costs at the JVs and an entity which is 97.5% owned by affiliates of CLNSCLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $0.7$2.6 million and $0.9$2.4 million for the three months ended June 30, 2018 and 2017, and 2016, respectively. CostThe costs reimbursements decreased in 2017 due to a change in percentage of costs reimbursed for construction employees based on changes in the number of properties being renovated from 2016 to 2017 at the various portfolios. The decline in cost reimbursements waswere offset by the decline in reimbursed costs from unconsolidated real estate entities included in operating expenses.

As reported by Smith Travel Research, industry RevPAR for the three months ended June 30, 2018 and 2017 increased 4.0% and 2016 increased 2.7% and 3.5%, respectively, in the 20172018 and 20162017 periods as compared to the respective prior periods. RevPAR at our wholly owned hotels increased 0.8% and decreased 0.5% and increased 0.6%, respectively, in the 20172018 and 20162017 periods as compared to the respective prior periods.periods primarily due to lower growth in our specific markets primarily due to new supply.
    
In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR results for the 3840 hotels wholly owned by the Company as of June 30, 20172018 reflect the performance of the hotels during the entire period, regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.

For the three months ended June 30,    For the three months ended June 30,    
2017 2016 Percentage Change2018 2017 Percentage Change
Same Property (38 hotels) Actual (38 hotels) Same Property (38 hotels) Actual (38 hotels) Same Property(38 hotels) Actual (38/38 hotels)Same Property (40 hotels) Actual (40 hotels) Same Property (40 hotels) Actual (38 hotels) Same Property (40 hotels) Actual (40/38 hotels)
Occupancy82.8% 82.8% 85.7% 85.7% (3.3)% (3.3)%83.1% 83.1% 82.9% 82.8% 0.2% 0.4%
ADR$169.06
 $169.06
 $164.28
 $164.28
 2.9 % 2.9 %$171.89
 $171.89
 $170.90
 $169.06
 0.6% 1.7%
RevPAR$140.06
 $140.06
 $140.78
 $140.78
 (0.5)% (0.5)%$142.88
 $142.88
 $141.70
 $140.06
 0.8% 2.0%
RevPAR decreased 0.5% primarilyincreased 0.8% due to an increase in ADR of 2.9%0.6% and a decreasean increase in occupancy of 3.3%0.2%. As the lodging cycle matures, occupancy growth stabilizes and hotels drive most of their increases in room revenue through increases in rates.

Hotel Operating Expenses

Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):
For the three months ended  For the three months ended  
June 30, 2017 June 30, 2016 % ChangeJune 30, 2018 June 30, 2017 % Change
Hotel operating expenses:          
Room$15,024
 $14,574
 3.1 %$15,945
 $15,024
 6.1%
Food and beverage1,212
 1,245
 (2.7)%1,739
 1,212
 43.5%
Telephone387
 430
 (10.0)%415
 387
 7.2%
Other710
 638
 11.3 %796
 710
 12.1%
General and administrative5,974
 5,700
 4.8 %6,781
 5,974
 13.5%
Franchise and marketing fees6,089
 5,948
 2.4 %6,575
 6,089
 8.0%
Advertising and promotions1,270
 1,344
 (5.5)%1,485
 1,270
 16.9%
Utilities2,352
 2,235
 5.2 %2,446
 2,352
 4.0%
Repairs and maintenance3,179
 3,158
 0.7 %3,637
 3,179
 14.4%
Management fees2,588
 2,384
 8.6 %2,807
 2,588
 8.5%
Insurance295
 338
 (12.7)%339
 295
 14.9%
Total hotel operating expenses$39,080
 $37,994
 2.9 %$42,965
 $39,080
 9.9%


Hotel operating expenses increased $1.1$3.9 million or 2.9%9.9% to $43.0 million for the three months ended June 30, 2018 from $39.1 million for the three months ended June 30, 2017 from $38.0 million for2017. The increase was primarily due to the three months ended June 30, 2016.hotels acquired in 2017 and increasing labor costs.

Room expenses, which are the most significant component of hotel operating expenses, increased $0.5$0.9 million or 3.1%6.1% from $14.6$15.0 million in 20162017 to $15.0$15.9 million in the second quarter of 2017.2018. The increase was primarily due to a workers compensation insurance creditthe three hotels acquired in 2016.2017 was $1.3 million, offset by the sale of the Carlsbad hotel of $0.5 million.

The remaining hotel operating expenses increased $0.6$2.9 million, from $23.4 million in the second quarter of 2016 to $24.1 million in the second quarter of 2017.2017 to $27.0 million in the second quarter of 2018. The increase due to the three hotels acquired in 2017 was $2.8 million, offset by the sale of the Carlsbad hotel of $0.6 million. For the 37 comparable hotels owned by us throughout the 2018 and 2017 periods, hotel operating expense was up $0.7 million primarily due to increases in bonuses, utilityincreased compensation costs and management fees.repairs and maintenance expenses.

Depreciation and Amortization

Depreciation and amortization expense decreased $0.6increased $0.2 million from $12.3 million for the three months ended June 30, 2016 to $11.7 million for the three months ended June 30, 2017.2017 to $11.9 million for the three months ended June 30, 2018. Depreciation related to the three hotels acquired in 2017 contributed $0.9 million of the increase. The decrease is due to lower depreciation at our other hotels is due to some assets being fully depreciated.depreciated and the sale of the Carlsbad hotel. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.

Impairment Loss
Impairment loss was $0.0 million for the three months ended June 30, 2018, compared to $6.7 million for the three months ended June 30, 2017. The Company recorded an impairment at our Washington SHS, PA hotel during the three months ended June 30, 2017.

Property Taxes, Ground Rent and Insurance

Total property taxes, ground rent and insurance expenses increased $0.6 million from $5.0 million for the three months ended June 30, 2016 to $5.6 million for the three months ended June 30, 2017.2017 to $6.2 million for the three months ended June 30, 2018. The increase is primarily attributeddue to increasedboth the three hotels that were acquired in 2017 and increases in real estate taxes at our hotels.other properties.

General and Administrative

General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of long-term incentive plan (“LTIP”) units in the Operating Partnership. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $1.0$1.2 million and $0.8$1.0 million for the three months ended June 30, 20172018 and 2016,2017, respectively) increased $0.1 million to $2.3$2.4 million for the three months ended June 30, 20172018 from $2.2$2.3 million in the three months ended June 30, 2016 with the increase primarily due to professional fees and travel expenses.2017.
Hotel Property Acquisition Costs and
Other Charges
Hotel property acquisition costs and other
Other charges decreasedincreased from $0.3 million for the three months ended June 30, 2016 to $15 thousand for the three months ended June 30, 2017. There has been no acquisition activity this year.2017 to $0.2 million for the three months ended June 30, 2018. Other charges primarily include costs related to due diligence for possible acquisitions that were not completed and costs from Hurricane Harvey.

Reimbursed Costs from Unconsolidated Real Estate Entities

Reimbursed costs from unconsolidated real estate entities, comprised of corporate payroll costs at the NewINK and Inland JVs and an entity which is 97.5% owned by affiliates of CLNSCLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $0.7$2.6 million and $0.9$2.4 million for the three months ended June 30, 2018 and 2017, and 2016, respectively. Reimbursed costs decreased in 2017 due to a change in percentage of costs reimbursed for construction employees based on changes in the number of properties being renovated from 2016 to 2017 at the various portfolios. The decline in costscost reimbursements waswere offset by the decline in cost reimbursements from unconsolidated real estate entities included in revenues.


Interest and Other Income

Interest on cash and cash equivalents and other income decreasedincreased $9 thousand from $6 thousand for the three months ended June 30, 2017 to $15 thousand for the three months ended June 30, 2016 to $6 thousand for the three months ended June 30, 2017.2018.
Interest Expense, Including Amortization of Deferred Fees
Interest expense decreased $0.3$0.1 million from $7.1 million for the three months ended June 30, 2016 to $6.8 million for the three months ended June 30, 2017 to $6.7 million for the three months ended June 30, 2018 and is comprised of the following (dollars in thousands):

For the three months ended  For the three months ended  
June 30, 2017 June 30, 2016 % ChangeJune 30, 2018 June 30, 2017 % Change
Mortgage debt interest$6,310
 $6,302
 0.1 %$6,084
 $6,310
 (3.6)%
Credit facility interest and unused fees582
 510
 14.1 %361
 582
 (38.0)%
Amortization of deferred financing costs(119) 280
 (142.5)%222
 (119) (286.6)%
Total$6,773
 $7,092
 (4.5)%$6,667
 $6,773
 (1.6)%

The decrease in interest expense for the three months ended June 30, 20172018 as compared to the three months ended June 30, 20162017 is primarily due to a change in amortizationlower principal balances on our mortgage debt and the sale of deferred financing fees.the Carlsbad hotel which was encumbered by mortgage debt. Interest expense on the Company's senior unsecured revolving credit facility increaseddecreased primarily due to an increasea decrease in LIBORutilization of the credit facility for the three months ended June 30, 20172018 compared to the three months ended June 30, 2016.2017.    
Impairment Loss
Impairment loss was $6.7 million for the three months ended June 30, 2017, compared to $0.0 million for the three months ended June 30, 2016. The Company recorded an impairment at our Washington SHS, PA hotel.
Income from Unconsolidated Real Estate Entities

Income from unconsolidated real estate entities was $0.9 million for the three months ended June 30, 20162017 and $0.9$1.0 million for the three months ended June 30, 2017.2018.
Loss on Sale from Unconsolidated Real Estate Entities
Loss on sale from unconsolidated real estate entities decreased $8.0 thousand to $0.0 thousand for the three months ended June 30, 2017 from $8.0 thousand for the three months ended June 30, 2016 due to finalizing the sale prorations of the Torrance JV. There were no sales of unconsolidated real estate entities in 2017.
Income Tax Expense

Income tax expense for the three months ended June 30, 20172018 and 20162017 was $0.0 million and $0.2$0.0 million, respectively. We are subject to income taxes based on the taxable income of our TRS Lessees at a combined federal and state tax rate of approximately 25%.

Net Income

Net income was $13.5 million for the three months ended June 30, 2018, compared to net income of $5.1 million for the three months ended June 30, 2017, compared to net income of $12.3 million for the three months ended June 30, 2016.2017. The change in net income was due to the factors discussed above.

Material Trends or Uncertainties

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either the capital resources or the revenues or income to be derived from the acquisition and operation of properties, loans and other permitted investments, other than those referred to in this report and in the risk factors identified in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Comparison of the six months ended June 30, 20172018 to the six months ended June 30, 20162017

Results of operations for the six months ended June 30, 20172018 include the operating activities of our 3840 wholly owned hotels and our investments in the NewINK JV and Inland JV. We wholly owned 38 hotels at January 1, 2017. Accordingly, the comparisons below are influenced by the fact that we acquired one hotel in Portsmouth, NH on September 20, 2017, one hotel in Summerville, SC on November 15, 2017 and one hotel in Springfield, VA on December 6, 2017. We also sold a hotel in Carlsbad, CA on December 20, 2017.
Revenues
Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned hotels, was as follows for the periods indicated (dollars in thousands):
Six Months Ended  Six Months Ended  
June 30, 2017 June 30, 2016 % ChangeJune 30, 2018 June 30, 2017 % Change
Room$137,194
 $136,702
 0.4 %$144,525
 $137,194
 5.3%
Food and beverage2,975
 3,234
 (8.0)%4,310
 2,975
 44.9%
Other5,413
 4,990
 8.5 %6,554
 5,413
 21.1%
Cost reimbursements from unconsolidated real estate entities1,549
 1,924
 (19.5)%5,234
 4,896
 6.9%
Total revenue$147,131
 $146,850
 0.2 %$160,623
 $150,478
 6.7%
Total revenue was $147.1$160.6 million for the six months ended June 30, 2017,2018, up $0.2$10.1 million compared to total revenue of $146.9$150.5 million for the corresponding 20162017 period. Total revenue related to the three hotels acquired during 2017 contributed $13.1 million of the increase, while the sale of one hotel in 2017 reduced revenue by $3.5 million. Since all of our hotels are select-service or limited-service hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group conference facilities. Room revenue comprised 93.2%90.0% and 93.1%91.2% of total revenue for the six months ended June 30, 20172018 and 2016,2017, respectively. Room revenue was $137.2$144.5 million and $136.7$137.2 million for the six months ended June 30, 20172018 and 2016,2017, respectively, with $0.5$11.5 million of the increase in 20172018 attributable to an increasethe three hotels acquired during 2017 and a loss of room revenue attributable to the one hotel sold in RevPAR2017 of 0.3%$3.4 million. For the 37 comparable hotels owned by us throughout the 2018 and 2017 periods, room revenue was down $0.7 million or 0.5%, driven primarily by RevPar decline of 0.7%.
Food and beverage revenue was $3.0$4.3 million, for the six months ended June 30, 2017, down $0.22018, up $1.3 million, compared to $3.2$3.0 million for the corresponding 2016 period due2017 period. Food and beverage revenue related to the hotels acquired in part to lower occupancy for2017 contributed $1.2 million of the period.increase.
Other operating revenue, comprised of parking, meeting room, gift shop, in-room movie and other ancillary amenities revenue, was $5.4$6.6 million and $5.0$5.4 million for the six months ended June 30, 2018 and 2017, and 2016, respectively. The increase related to the hotels acquired in 2017 contributed $0.5 million of the increase. The increase in other operating revenue related primarily to guaranteed no show bookings, restaurant lease incomecharges, miscellaneous room revenue and an insurance settlement.parking.
Cost reimbursements from unconsolidated real estate entities, comprised of payroll costs at the JVs and an entity which is 97.5% owned by affiliates of CLNSCLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $1.5$5.2 million and $1.9$4.9 million for the six months ended June 30, 20172018 and 2016,2017, respectively. Cost reimbursements decreased in 2017 due to a change in percentage of costs reimbursed for construction employees based on changes in the number of properties being renovated from 2016 to 2017 at the various portfolios. The decline in cost reimbursements was offset by the decline in reimbursed costs from unconsolidated real estate entities included in operating expenses.
As reported by Smith Travel Research, industry RevPAR for the six months ended June 30, 2018 and 2017 increased 3.8% and 2016 increased 3.0% and 3.1%, respectively, in the 20172018 and 20162017 periods as compared to the respective prior year periods. RevPAR at our wholly owned hotels decreased 0.7% and increased 0.3% and 1.5%, respectively, in the 20172018 and 20162017 periods as compared to the respective prior year periods.

In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the periods presented. Same property Occupancy, ADR, and RevPAR results for the 3840 hotels wholly owned by the Company as of June 30, 20172018 reflect the performance of the hotels during the entire period, regardless of our ownership during the period presented, which is a non-GAAP financial measure. Results for the hotels for periods prior to our ownership were provided to us by prior owners and have not been adjusted by us.

For the six months ended June 30,    For the six months ended June 30,    
2017 2016 Percentage Change2018 2017 Percentage Change
Same Property (38 hotels) Actual (38 hotels) Same Property (38 hotels) Actual (38 hotels) Same Property (38 hotels) Actual (38/38 hotels)Same Property (40 hotels) Actual (40 hotels) Same Property (40 hotels) Actual (38 hotels) Same Property (40 hotels) Actual (40/38 hotels)
Occupancy79.8% 79.8% 81.7% 81.7% (2.3)% (2.3)%79.4% 79.4% 79.8% 79.8% (0.5)% (0.5)%
ADR$166.29
 $166.29
 $161.89
 $161.89
 2.7 % 2.7 %$167.08
 $167.08
 $167.47
 $166.29
 (0.2)% 0.5 %
RevPAR$132.70
 $132.70
 $132.26
 $132.26
 0.3 % 0.3 %$132.65
 $132.65
 $133.57
 $132.70
 (0.7)%  %
The RevPAR increasedecrease of 0.3%0.7% was due to an increasea decrease in ADR of 2.7%0.2% and ana decrease in occupancy of 2.3%0.5%. As the lodging cycle matures, occupancy growth stabilizes and hotels drive most of their increases in room revenue through increases in rates.
Hotel Operating Expenses
Hotel operating expenses consist of the following for the periods indicated (dollars in thousands):
For the six months ended  For the six months ended  
June 30, 2017 June 30, 2016 % ChangeJune 30, 2018 June 30, 2017 % Change
Hotel operating expenses:          
Room$28,529
 $28,385
 0.5 %$30,499
 $28,529
 6.9%
Food and beverage2,464
 2,423
 1.7 %3,479
 2,464
 41.2%
Telephone795
 851
 (6.6)%874
 795
 9.9%
Other1,310
 1,227
 6.8 %1,517
 1,310
 15.8%
General and administrative11,628
 11,196
 3.9 %12,814
 11,628
 10.2%
Franchise and marketing fees11,391
 11,136
 2.3 %12,100
 11,391
 6.2%
Advertising and promotions2,602
 2,696
 (3.5)%3,050
 2,602
 17.2%
Utilities4,722
 4,617
 2.3 %5,146
 4,722
 9.0%
Repairs and maintenance6,431
 6,359
 1.1 %7,261
 6,431
 12.9%
Management fees4,835
 4,613
 4.8 %5,243
 4,835
 8.4%
Insurance628
 675
 (7.0)%672
 628
 7.0%
Total hotel operating expenses$75,335
 $74,178
 1.6 %$82,655
 $75,335
 9.7%

Hotel operating expenses increased $1.1$7.4 million to $82.7 million for the six months ended June 30, 2018 from $75.3 million for the six months ended June 30, 2017 from $74.2 million for the six months ended June 30, 2016.2017.

Room expenses, which are the most significant component of hotel operating expenses, remained staticincreased $2.0 million from $28.4 million for the six months ended June 30, 2016 compared to $28.5 million for the six months ended June 30, 2017.2017 compared to $30.5 million for the six months ended June 30, 2018. The increase was primarily due to a workers compensation insurance creditthe three hotels acquired in 2016.2017 was $2.5 million, offset by the sale of the Carlsbad hotel of $0.9 million. For the 37 comparable hotels owned by us throughout the 2018 and 2017 periods, room expense was up $0.4 million.

The remaining hotel operating expenses increased $1.0$5.4 million, from $45.8 million for the six months ended June 30, 2016 to $46.8 million for the six months ended June 30, 2017.2017 to $52.2 million for the six months ended June 30, 2018. The increase due to the three hotels acquired in remaining2017 was $5.2 million, offset by the sale of the Carlsbad hotel of $1.1 million. For the 37 comparable hotels owned by us throughout the 2018 and 2017 periods, hotel operating expenses is mainly attributable bonuses, franchise fees related to increased revenues, utilities costs and management fees.expense was up $1.1 million.

Depreciation and Amortization
Depreciation and amortization expense decreased $1.1increased $0.3 million from $24.8 million for the six months ended June 30, 2016 to $23.7 million for the six months ended June 30, 2017.2017 to $24.0 million for the six months ended June 30, 2018. Depreciation related to the three hotels acquired in 2017 contributed $1.9 million of the increase. The decrease is due to lower depreciation at our other hotels is due to some assets being fully depreciated.depreciated and the sale of the Carlsbad hotel. Depreciation is generally recorded on our assets over 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally between the date of acquisition and the date that the furniture, fixtures and equipment will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise agreement.
Impairment Loss
Impairment loss was $0.0 million for the six months ended June 30, 2018, compared to $6.7 million for the six months ended June 30, 2017. The Company recorded an impairment at our Washington SHS, PA hotel during the six months ended June 30, 2017.
Property Taxes, Ground Rent and Insurance
Total property taxes and insurance expenses increased $0.4$1.6 million from $10.0 million for the six months ended June 30, 2016 to $10.4 million for the six months ended June 30, 2017.2017 to $12.0 million for the six months ended June 30, 2018. The increase is primarily attributeddue to increasedboth the three hotels that were acquired in 2017 and increases in real estate taxes at our hotels.other properties.
General and Administrative
General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses and amortization of restricted stock and awards of LTIP units. These expenses also include corporate operating costs, professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based compensation of $1.8$2.1 million and $1.5$1.8 million for the six months ended June 30, 20172018 and 2016,2017, respectively) increased $0.2$0.3 million to $5.1 million for the six months ended June 30, 2018 from $4.8 million for the six months ended June 30, 2017 from $4.6 million for the six months ended June 30, 2016, with the increase primarily due to salaries, professional fees, travel expenses and office expenses.2017.
Hotel Property Acquisition Costs and Other Charges
Hotel property acquisition costs and other charges decreased $0.3increased $0.2 million from $15 thousand for the six months ended June 30, 2017 to $0.3 million for the six months ended June 30, 2016 to $15.0 thousand for the six months ended June 30, 2017. Property acquisition2018. Other charges primarily include costs of $0.3 million in the 2016 period related to a prior acquisitiondue diligence for which final amountspossible acquisitions that were more than previously accrued. Acquisition-relatednot acquired and costs are expensed when incurred.from Hurricane Harvey.
Reimbursed Costs from Unconsolidated Real Estate Entities
Reimbursed costs from unconsolidated real estate entities, comprised of corporate payroll costs at the JVs and an entity which is 97.5% owned by affiliates of CLNSCLNY and 2.5% by Mr. Fisher, where the Company is the employer, were $1.5$5.2 million and $1.9$4.9 million for the six months ended June 30, 20172018 and 2016,2017, respectively. Reimbursed costs decreased in 2017 due to a change in percentage of costs reimbursed for construction employees based on changes in the number of properties being renovated from 2016 to 2017 at the various portfolios. The decline in costs reimbursements was offset by the decline in cost reimbursements from unconsolidated real estate entities included in revenues.

Interest and Other Income
Interest on cash and cash equivalents and other income decreased $18.0$1.0 thousand from $36.0 thousand for the six months ended June 30, 2016 to $18.0 thousand for the six months ended June 30, 2017.2017 to $17.0 thousand for the six months ended June 30, 2018.
Interest Expense, Including Amortization of Deferred Fees
Interest expense decreased $0.3$0.5 million from$14.1 million for the six months ended June 30, 2016 to $13.8 million for the six months ended June 30, 2017 to $13.3 million for the six months ended June 30, 2018 and is comprised of the following (dollars in thousands):
For the six months ended  For the six months ended  
June 30, 2017 June 30, 2016 % ChangeJune 30, 2018 June 30, 2017 % Change
Mortgage debt interest$12,495
 $12,571
 (0.6)%$12,115
 $12,495
 (3.0)%
Credit facility interest and unused fees1,129
 1,009
 11.9 %719
 1,129
 (36.3)%
Amortization of deferred financing costs141
 549
 (74.3)%464
 141
 229.1 %
Total$13,765
 $14,129
 (2.6)%$13,298
 $13,765
 (3.4)%

The decrease in interest expense for the six months ended June 30, 20172018 as compared to the six months ended June 30, 20162017 is primarily due to a change in amortizationlower principal balances on our mortgage debt and the sale of deferred financing fees.the Carlsbad hotel which was encumbered by mortgage debt. Interest expense on the Company's senior unsecured revolving credit facility increaseddecreased primarily due to an increasea decrease in LIBORutilization of the credit facility in the six months ended June 30, 20172018 compared to the six months ended June 30, 2016.
Impairment Loss
Impairment loss was $6.7 million for the six months ended June 30, 2017, compared to $0.0 million for the six months ended June 30, 2016. The Company recorded an impairment at our Washington SHS, PA hotel during the six months ended June 30, 2017.

Loss on Early ExtinguishmentSale of DebtHotel Property

Loss on early extinguishmentsale of debt was zero for the six months ended June 30, 2017, compared to $4.0hotel property increased $18 thousand for the six months ended June 30, 2016,2018 due to paying offadditional expenses related to the loan associated withsale of the AltoonaHomewood Suites Carlsbad hotel in January 2016 instead of at the maturity date of April 2016.on December 20, 2017.    

Income from Unconsolidated Real Estate Entities
Income from unconsolidated real estate entities increaseddecreased $0.5 million from income of $0.8 million for the six months ended June 30, 2017 to income of $0.3 million for the six months ended June 30, 2016 to income of $0.8 million for the six months ended June 30, 2017.2018. The increase is due primarily to a loss onan increase in interest and amortization expense related to the Inland JV of $0.1floating rate debt at each JV.
Income Tax Expense
Income tax expense decreased $0.3 million and income on the NewINK JV of $1.0from $0.3 million for the six months ended June 30, 2017 compared to a loss of $0.3 million on the Inland JV, which was conducting renovations at multiple hotels, and income of $0.6 million on the NewINK JV for the six months ended June 30, 2016.

Loss on Sale from Unconsolidated Real Estate Entities
Loss on sale from unconsolidated real estate entities decreased $8.0 thousand from $8.0 thousand for the six months ended June 30, 2016 to zero for the six months ended June 30, 2017 due to the finalizing the sale prorations of Torrance JV. There were no sales of unconsolidated real estate entities in 2017.
Income Tax Expense
Income tax expense increased $0.1 million from $0.2$0.0 million for the six months ended June 30, 2016 to $0.32018.
Net Income
Net income was $16.4 million for the six months ended June 30, 2017. The TRS incurred a tax loss in 2017. There is a valuation allowance resulting in a zero tax provision.
Net Income
Net2018, compared to net income wasof $9.7 million for the six months ended June 30, 2017, compared to net income of $15.6 million for the six months ended June 30, 2016.2017. The change in net income was due to the factors discussed above.


Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) EBITDAre, (5) Adjusted EBITDA and (5)(6) Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as prescribed by GAAP as a measure of our operating performance.
FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities under GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of our liquidity, nor are FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA indicative of funds available to fund our cash needs, including our ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO, Adjusted FFO, EBITDA, EBITDAre,Adjusted EBITDA and Adjusted Hotel EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties.
We calculate FFO in accordance with standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment write-downs, the cumulative effect of changes in accounting principles, plus depreciation and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures following the same approach. We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it measures our performance without regard to specified non-cash items such as real estate depreciation and amortization, gain or loss on sale of real estate assets and certain other items that we believe are not indicative of the property level performance of our hotel properties. We believe that these items reflect historical cost of our asset base and our acquisition and disposition activities and are less reflective of our ongoing operations, and that by adjusting to exclude the effects of these items, FFO is useful to investors in comparing our operating performance between periods and between REITs that also report FFO using the NAREIT definition.
We calculate Adjusted FFO by further adjusting FFO for certain additional items that are not addressed in NAREIT’s definition of FFO, including hotel property acquisition costs and other charges, losses on the early extinguishment of debt and similar items related to our unconsolidated real estate entities that we believe do not represent costs related to hotel operations. We believe that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and between REITs that make similar adjustments to FFO.

The following is a reconciliation of net income to FFO and Adjusted FFO for the three and six months ended June 30, 20172018 and 20162017 (in thousands, except share data):
 
For the three months endedFor the six months endedFor the three months ended For the six months ended
June 30,June 30, June 30,
2017 20162017 20162018 2017 2018 2017
Funds From Operations (“FFO”):            
Net income$5,069
 $12,250
$9,713
 $15,572
$13,487
 $5,069
 $16,353
 $9,713
Loss on sale from unconsolidated real estate entities
 8

 8
Loss on sale of hotel property1
 
 18
 
Depreciation11,661
 12,227
23,611
 24,649
11,863
 11,661
 23,841
 23,611
Impairment loss6,663
 
6,663
 

 6,663
 
 6,663
Adjustments for unconsolidated real estate entity items1,763
 2,015
3,234
 3,976
1,757
 1,763
 3,434
 3,234
FFO attributable to common share and unit holders25,156
 26,500
43,221
 44,205
27,108
 25,156
 43,646
 43,221
Hotel property acquisition costs and other charges15
 298
15
 310
Loss on early extinguishment of debt
 

 4
Other charges264
 15
 250
 15
Adjustments for unconsolidated real estate entity items8
 13
15
 23
3
 8
 15
 15
Adjusted FFO attributable to common share and unit holders$25,179
 $26,811
$43,251
 $44,542
$27,375
 $25,179
 $43,911
 $43,251
Weighted average number of common shares     
Weighted average number of common shares and units       
Basic38,795,416
 38,556,907
38,707,640
 38,544,565
46,230,092
 38,795,416
 46,158,176
 38,707,640
Diluted39,019,771
 38,734,987
38,923,165
 38,704,693
46,447,156
 39,019,771
 46,353,714
 38,923,165
Diluted weighted average number of common share count used for calculation of adjusted FFO per share may differ from diluted weighted average common share count used for calculation of GAAP Net Income per share by LTIP units, which may be converted to common shares of beneficial interest if Net Income per share is negative and Adjusted FFO is positive. Unvested restricted shares and unvested LTIP units that could potentially dilute basic earnings per share in the future would not be included in the computation of diluted loss per share for the periods where a loss has been recorded because they would have been anti-dilutive for the periods presented.
We calculate EBITDA for purposes of the credit facility debt covenantsEarnings before interest, taxes, depreciation and amortization ("EBITDA") is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to salesales of assets; (3) depreciation and amortization; and (4) unconsolidated real estate entity items including interest, depreciation and amortization excluding gains orand losses from sales of real estate. We believeconsider EBITDA is useful to investorsan investor in evaluating our operating performance because it helps investors compareand facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In addition, we use EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions.
We calculate AdjustedIn addition to EBITDA, by further adjustingwe present EBITDA for certain additional items, including hotel property acquisition costsre in accordance with NAREIT guidelines, which defines EBITDAre as net income or loss excluding interest expense, income tax expense, depreciation and other charges, impairment write downs,amortization expense, gains or losses on the salefrom sales of real estate, losses on the early extinguishment of debt, amortization of non-cash share-based compensationimpairment, and similar items related to ouradjustments for unconsolidated real estate entities which we believe are not indicative of the performance of our underlying hotel properties entities.joint ventures. We believe that Adjustedthe presentation of EBITDAre provides useful information to investors with another financial measure that mayregarding the Company's operating performance and can facilitate comparisons of operating performance between periods and between REITsREITs.
We also present Adjusted EBITDA, which includes additional adjustments for items such as other charges, gains or losses on extinguishment of indebtedness, transaction costs, the amortization of share-based compensation, and certain other expenses that report similar measures.we consider outside the normal course of operations. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income, EBITDA and EBITDAre, is beneficial to an investor's understanding of our performance.

The following is a reconciliation of net income to EBITDA, EBITDAreand Adjusted EBITDA for the three and six months ended June 30, 20172018 and 20162017 (in thousands):
For the three months ended For the six months endedFor the three months ended For the six months ended
June 30, June 30,June 30, June 30,
2017 2016 2017 20162018 2017 2018 2017
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”):              
Net income$5,069
 $12,250
 $9,713
 $15,572
$13,487
 $5,069
 $16,353
 $9,713
Interest expense6,773
 7,092
 13,765
 14,129
6,667
 6,773
 13,298
 13,765
Income tax expense
 179
 317
 179

 
 
 317
Depreciation and amortization11,714
 12,281
 23,718
 24,756
11,921
 11,714
 23,958
 23,718
Adjustments for unconsolidated real estate entity items3,825
 3,968
 7,137
 7,950
4,052
 3,825
 7,962
 7,137
EBITDA27,381
 35,770
 54,650
 62,586
36,127
 27,381
 61,571
 54,650
Hotel property acquisition costs and other charges15
 298
 15
 310
Impairment loss6,663
 
 6,663
 

 6,663
 
 6,663
Loss on early extinguishment of debt
 
 
 4
Loss on sale of hotel property1
 
 18
 
EBITDAre
36,128
 34,044
 61,589
 61,313
Other charges264
 15
 250
 15
Adjustments for unconsolidated real estate entity items28
 27
 42
 36
25
 28
 14
 42
Loss on sale from unconsolidated real estate entities
 8
 
 8
Share based compensation999
 759
 1,786
 1,495
$1,196
 $999
 $2,114
 $1,786
Adjusted EBITDA$35,086
 $36,862
 $63,156
 $64,439
37,613
 35,086
 63,967
 63,156

Adjusted Hotel EBITDA is defined as net income before interest, income taxes, depreciation and amortization, corporate general and administrative, hotel property acquisition costs,impairment loss, loss on early extinguishment of debt, other charges, interest and other income and income or loss from unconsolidated real estate entities. We present Adjusted Hotel EBITDA because we believe it is useful to investors in comparing our hotel operating performance between periods and comparing our Adjusted Hotel EBITDA margins to those of our peer companies. Adjusted Hotel EBITDA represents the results of operations for our wholly owned hotels only.
The following is a presentation of Adjusted Hotel EBITDA for the three and six months ended June 30, 20172018 and 20162017 (in thousands):
 For the three months endedFor the six months ended For the three months ended For the six months ended
 June 30, June 30, June 30,
 2017 20162017 2016 2018 2017 2018 2017
              
Net Income $5,069
 $12,250
$9,713
 $15,572
 $13,487
 $5,069
 $16,353
 $9,713
Add:Interest expense6,773
 7,092
13,765
 14,129
Interest expense6,667
 6,773
 13,298
 13,765
Income tax expense
 179
317
 179
Income tax expense
 
 
 317
Depreciation and amortization11,714
 12,281
23,718
 24,756
Depreciation and amortization11,921
 11,714
 23,958
 23,718
Corporate general and administrative3,287
 2,972
6,555
 6,084
Corporate general and administrative3,547
 3,287
 7,169
 6,555
Hotel property acquisition costs and other charges15
 298
15
 310
Other charges264
 15
 250
 15
Impairment loss6,663
 
6,663
 
Impairment loss
 6,663
 
 6,663
Loss on early extinguishment of debt
 

 4
Loss on sale of hotel property1
 
 18
 
Loss on sale from unconsolidated real estate entities
 8

 8
Less:Interest and other income(6) (15)(18) (36)Interest and other income(15) (6) (17) (18)
Income from unconsolidated real estate entities(927) (942)(842) (295)Income from unconsolidated real estate entities(1,004) (927) (250) (842)
Adjusted Hotel EBITDA$32,588
 $34,123
$59,886
 $60,711
Adjusted Hotel EBITDA$34,868
 $32,588
 $60,779
 $59,886
    
Although we present FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA because we believe they are useful to investors in comparing our operating performance between periods and between REITs that report similar measures, these measures have limitations as analytical tools. Some of these limitations are:

FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect funds available to make cash distributions;
EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may need to be replaced in the future, and FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect any cash requirements for such replacements;
Non-cash compensation is and will remain a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period using Adjusted EBITDA;
Adjusted FFO, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect the impact of certain cash charges (including acquisition transaction costs) that result from matters we consider not to be indicative of the underlying performance of our hotel properties; and
Other companies in our industry may calculate FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA differently than we do, limiting their usefulness as a comparative measure.

In addition, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA do not represent cash generated from operating activities as determined by GAAP and should not be considered as alternatives to net income or loss, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA are not measures of our liquidity. Because of these limitations, FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using FFO, Adjusted FFO, EBITDA, EBITDAre, Adjusted EBITDA and Adjusted Hotel EBITDA only supplementally. Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with GAAP.

Sources and Uses of Cash

Our principal sources of cash include net cash from operations and proceeds from debt and equity issuances. Our principal uses of cash include acquisitions, capital expenditures, operating costs, corporate expenditures, interest costs, debt repayments and distributions to equity holders.
As of June 30, 20172018 and December 31, 20162017, we had cash, and cash equivalents and restricted cash of approximately $12.8$36.0 million and $12.1$36.5 million, respectively. Additionally, we had $205.0$223.0 million available under our $250.0 million senior unsecured revolving credit facility as of June 30, 20172018.
For the six months ended June 30, 2018, net cash flows provided by operations were $37.9 million, driven by net income of $16.4 million, $26.1 million of non-cash items, including $24.3 million of depreciation and amortization, $2.1 million of share-based compensation expense, offset by $0.3 million related to income from unconsolidated entities. In addition, changes in operating assets and liabilities due to the timing of cash receipts, payments for real estate taxes, payments of corporate compensation and payments from our hotels resulted in net cash outflow of $4.6 million. Net cash flows used in investing activities were $9.9 million, primarily related to capital improvements on our 40 wholly owned hotels of $12.7 million, offset by distributions of $2.8 million from unconsolidated real estate entities. Net cash flows used by financing activities were $28.6 million, comprised of $10.7 million of common equity proceeds raised through sales under our New DRSPP, offset by net repayments of our senior unsecured revolving credit facility of $5.0 million, principal payments or payoffs on mortgage debt of $2.4 million, payments of deferred financing and offering costs of $1.2 million, and distributions to shareholders of $30.7 million.

For the six months ended June 30, 2017, net cash flows provided by operations were $36.6 million, driven by net income of $9.7 million, $31.4 million of non-cash items, including $23.8 million of depreciation and amortization, $6.7 million of impairment loss and $1.8 million of share-based compensation expense, offset by $0.9 million related to income from unconsolidated entities. In addition, changes in operating assets and liabilities due to the timing of cash receipts, payments for real estate taxes, payments of corporate compensation and payments from our hotels resulted in net cash outflow of $4.5 million. Net cash flows used in investing activities were $17.1 million, primarily related to capital improvements on our 38 wholly owned hotels of $12.9 million and $5.0 million related to our Inland JV investment, offset by distributions of $0.7 million from unconsolidated real estate entities and $0.1 million related to escrow disbursements of restricted cash. Net cash flows used by financing activities were $18.8 million, comprised of $16.9 million of common equity proceeds raised through sales under our at-the-market plan ("Prior ATM Plan")Plan and dividend reinvestment and share purchase plan ("DRSPP"),Prior DRSPP, net repayments of our senior unsecured revolving credit facility of $7.5 million, principal payments or payoffs on mortgage debt of $2.1 million, payments of deferred financing and offering costs of $0.5 million, and distributions to shareholders of $25.6 million.

For the six months ended June 30, 2016, net cash flows provided by operations were $39.6 million, driven by net income of $15.6 million, $26.5 million of non-cash items including $25.3 million of depreciation and amortization and $1.5 million of share-based compensation expense, a $4 thousand loss on early extinguishment of debt, offset by $0.3 million related to loss from unconsolidated entities. In addition, changes in operating assets and liabilities due to the timing of cash receipts, payments for real estate taxes, payments of corporate compensation and payments from our hotels resulted in net cash outflow of $2.5 million. Net cash flows used in investing activities were $10.9 million, primarily related to capital improvements on our 38 wholly owned hotels of $11.8 million and $3.2 million related to required escrow deposits of restricted cash, reduced by distributions of $4.1 million from unconsolidated real estate entities. Net cash flows used by financing activities were $34.4 million, comprised of $0.2 million raised through our DRSPP, net borrowings on our senior unsecured revolving credit facility of $0.7 million, principal payments or payoffs on mortgage debt of $7.7 million, payments of deferred financing and offering costs of $0.1 million, and distributions to shareholders of $27.5 million.
In March 2016, we changed the monthly dividend and distribution from $0.10 to $0.11 per common share and LTIP unit. We declared total dividends of $0.66 and $0.64$0.66 per common share and LTIP unit for the six months ended June 30, 20172018 and 2016,2017, respectively.


Liquidity and Capital Resources

At June 30, 2017,2018, our leverage ratio was 38.8%33.3% based on the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash equivalents) to hotel investments at cost, including our JV investments. Over the past several years, we have maintained a leverage ratio between the mid-30s and the low 50s to fund our acquisitions and investments in joint ventures. At June 30, 2017,2018, we have total debt of $575.5$533.0 million at an average rate of approximately 4.6%. Accordingly, our debt coverage ratios are currently favorable and we are comfortable in this leverage range and believe we have the capacity and flexibility to take advantage of acquisition opportunities as they arise. We intend to continue to fund our investments with a prudent balance of debt and equity. We will pay down borrowings on our senior unsecured revolving credit facility with excess cash flow until we find other uses of cash such as investments in our existing hotels, hotel acquisitions or further joint venture investments.
At June 30, 20172018 and December 31, 2016,2017, we had $45.0$27.0 million and $52.5$32.0 million, respectively, in outstanding borrowings under our senior unsecured revolving credit facility. At June 30, 2017,2018, the maximum borrowing availability under the senior unsecured revolving credit facility was $250.0 million. We also had mortgage debt on individual hotels aggregating $530.5$506.0 million and $532.6$508.5 million at June 30, 20172018 and December 31, 2016,2017, respectively.

Our senior unsecured credit facility contains representations, warranties, covenants, terms and conditions customary for transactionscredit facilities of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and minimum net worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments, (iv) distributions, and (v) mergers and asset dispositions, covenants to preserve corporate existence and comply with laws, covenants on the use of proceeds of the senior unsecured revolving credit facility and default provisions, including defaults for non-payment, breach of representations and warranties, insolvency, non-performance of covenants, cross-defaults and guarantor defaults.

On March 8, 2018, we refinanced our senior unsecured credit facility with a new maturity date in March 2023, which includes the option to extend the maturity by an additional year, and replaces our previous $250 million senior unsecured credit facility that was scheduled to mature in 2020. Borrowing costs have been reduced by 0 to 15 basis points from comparable leverage-based pricing levels in our previous credit facility. At our current leverage level, the borrowing cost under the new facility is LIBOR plus 1.65 percent. We were in compliance with all financial covenants at June 30, 20172018. We expect to meet all financial covenants during the remainder of 20172018 based upon our current projections.
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our senior unsecured revolving credit facility or through the encumbrance of any unencumbered hotels. We believe that our net cash provided by operations will be adequate to fund operating obligations, pay interest on any borrowings and fund dividends in accordance with the requirements for qualification as a REIT under the Code. We expect to meet our long-term liquidity requirements, such as hotel property acquisitions and debt maturities or repayments through additional long-term secured and unsecured borrowings, the issuance of additional equity or debt securities or the possible sale of existing assets.
Through ourIn January 2014, the Company established a $25 million dividend reinvestment and stock purchase plan (the "Prior DRSPP"). We filed a new $50 million registration statement for the dividend reinvestment and stock purchase plan (the "New DRSPP" and together with the Prior DRSPP, which was established in January 2014,the "DRSPPs") on December 28, 2017 to replace the prior program. Under the DRSPPs, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends received on ourthe Company's common shares. Shareholders may also make optional cash purchases of ourthe Company's common shares subject to certain limitations detailed in the prospectus for the DRSPP.DRSPPs. During the three months ended June 30, 2018, we issued 7,212 shares under the New DRSPP at a weighted average price of $20.02, which generated $0.1 million in gross proceeds. As of June 30, 2017,2018, we had issued 211,1311,215,181 shares under the DRSPP at a weighted average price of $20.27.$21.61. As of June 30, 2017,2018, there was approximately $20.7$39.3 million available for issuance under the New DRSPP.


In January 2014, we also established our At the Market Equity Offering ("Prior ATM PlanPlan") whereby, from time to time, we may publicly offer and sell our common shares having an aggregate maximum offering price of up to $50 million of our common shares by means of ordinary brokers’ transactions on the NYSE, in negotiated transactions or in transactions that are deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act of 1933, with Cantor Fitzgerald & Co. ("Cantor") acting as sales agent pursuant to a Sales Agreement (the “Cantor Sales Agreement”).agent. On January 13, 2015, the Company entered into a Sales Agreement (the “Barclays Sales Agreement”)sales agreement with Barclays Capital Inc. (“Barclays”) to add Barclays as an additional sales agent under the Company’s Prior ATM Plan. We filed a $100 million registration statement for a new ATM program (the "ATM Plan" and together with the Prior ATM Plan, the "ATM Plans") on December 28, 2017 to replace the prior program. At the same time, the Company entered into sales agreements with Cantor, Barclays, Robert W. Baird & Co. Incorporated, ("Baird"), Citigroup Global Markets Inc. ("Citigroup"), Stifel, Nicolaus & Company, Incorporated ("Stifel") and Wells Fargo Securities, LLC ("Wells Fargo") as sales agents. During the three months ended June 30, 2018, we issued no shares under the ATM Plan. Total shares issued under the ATM PlanPlans since the inception of the plan are 1,528,7452,147,695 at a weighted average price of $22.22$21.87 raising netgross proceeds after sales commissions and fees of approximately $34.0$47.0 million. As of June 30, 2017,2018, there was approximately $16.0$100.0 million available for issuance under the ATM Plan.
We intend to continue to invest in hotel properties as suitable opportunities arise. We intend to finance our future investments with free cash flow, the net proceeds from additional issuances of common and preferred shares, issuances of common units in our Operating Partnership or other securities, borrowings or asset sales. The success of our acquisition strategy depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of certain hotels as a means to provide liquidity.

Dividend Policy

Our current common share dividend policy is generally to distribute, annually, approximately 100% of our annual taxable income. The amount of any dividends is determined by our Board of Trustees. Our current monthly dividend and distribution rate is $0.11 per common share and LTIP unit. The aggregate amount of dividends and distributions declared for the six months ended June 30, 20172018 was $0.66 per common share and LTIP unit.

Capital Expenditures

We intend to maintain each hotel property in good repair and condition and in conformity with applicable laws and regulations and in accordance with the franchisors' standards and any agreed-upon requirements in our management and loan agreements. After we acquire a hotel property, we may be required to complete a property improvement plan (“PIP”) in order to be granted a new franchise license for that particular hotel property. PIPs are intended to bring the hotel property up to the franchisors' standards. Certain of our loans require that we escrow, for property improvement purposes, at the hotels collateralizing these loans, amounts up to 5% of gross revenue from such hotels. We intend to spend amounts necessary to
comply with any reasonable loan or franchisor requirements and otherwise to the extent that such expenditures are in the best interest of the hotel. To the extent that we spend more on capital expenditures than is available from our operations, we intend to fund those capital expenditures with available cash and borrowings under our senior unsecured revolving credit facility.

For the three months ended June 30, 20172018 and 2016,2017, we invested approximately $6.9$5.9 million and $8.3$7.8 million, respectively, and for the six months ended June 30, 20172018 and 2016,2017, we invested approximately $13.8$12.8 million and $18.1$12.9 million, respectively, on capital investments in our hotels. We expect to invest an additional $13.1$20.3 million on renovations, discretionary and emergency expenditures on our existing hotels for the remainder of 2017.2018.

The Company is continuing with plans to expand two Residence Inns located in Sunnyvale, CA. The expansions are expected to include a new lobby and public spaces in each location. We are not certain when the expansions of the two Sunnyvale Residence Inns will commence. It is possible that one or both of these projects will commence in 2017, but the timing is uncertain due to potential delays related to finalizing plans, obtaining approvals from local authorities and ensuring costs to complete the expansions justify the investment. While we do not have final budgets for these projects, we currently anticipate that total expenditures will be approximately $75$80 million to $80$90 million, but these costs are subject to change.


Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements at June 30, 2018, other than non-recourse debt associated with the NewINK JV and the Inland JV. In connection with certain non-recourse mortgage loans in either the NewINK JV or Inland JV, our Operating Partnership could require us to repay our pro rata share of portions of each respective JVs indebtedness in connection with certain customary non-recourse carve-out provisions such as environmental conditions, misuse of funds and material misrepresentations.

Contractual Obligations

The following table sets forth our contractual obligations as of June 30, 20172018 and the effect these obligations are expected to have on our liquidity and cash flow in future periods (in thousands). We had no material off-balance sheet arrangements at June 30, 2017, other than non-recourse debt associated with the NewINK JV and the Inland JV as discussed below.
Payments Due by PeriodPayments Due by Period
Contractual ObligationsTotal Less Than
One Year
 One to Three
Years
 Three to Five
Years
 More Than Five
Years
Total Less Than
One Year
 One to Three
Years
 Three to Five
Years
 More Than Five
Years
Corporate office lease (1)$7,751
 $380
 $1,564
 $1,644
 $4,163
$6,987
 $389
 $1,604
 $2,558
 $2,436
Revolving credit facility, including interest (2)52,463
 1,097
 4,388
 46,978
 
33,402
 869
 3,476
 29,057
 
Ground leases75,039
 608
 2,437
 2,540
 69,454
76,440
 635
 2,593
 3,987
 69,225
Property loans, including interest (2)672,453
 14,692
 61,690
 80,484
 515,587
618,004
 14,473
 63,197
 220,185
 320,149
Total$807,706
 $16,777
 $70,079
 $131,646
 $589,204
$734,833
 $16,366
 $70,870
 $255,787
 $391,810
(1)
The Company entered into a new corporate office lease in 2015. The lease is for eleven years and includes a 12-month rent abatement period and certain tenant improvement allowances. The Company shares the space with related parties and is reimbursed for the pro-rata share of rentable space occupied by related parties.
(2)Does not reflect paydowns or additional borrowings under the senior unsecured revolving credit facility after June 30, 2017.2018. Interest payments are based on the interest rate in effect as of June 30, 2017.2018. See Note 7,6, “Debt” to our unaudited consolidated financial statements for additional information relating to our property loans.
In addition to the above listed obligations, we pay management and franchise fees to our hotel management companies and franchisors based on the revenues of our hotels.

The Company’s ownership interests in the JVs are subject to change in the event that either we or CLNSCLNY calls for additional capital contributions to the respective JVs necessary for the conduct of that JV's business, including contributions to fund costs and expenses related to capital expenditures. We manage the NewINK JV and Inland JV and will receive a promote interest in the applicable JV if it meets certain return thresholds. CLNSCLNY may also approve certain actions related to the JVs without the Company’s consent, including certain property dispositions conducted at arm’s length, certain actions related to the restructuring of the JVs and removal of the Company as managing member in the event the Company fails to fulfill its material obligations under the respective joint venture agreements.
In connection with certain non-recourse mortgage loans in either the NewINK JV or Inland JV, our Operating Partnership could require us to repay our pro rata share of portions of each respective JV'sJVs indebtedness in connection with certain customary non-recourse carve-out provisions such as environmental conditions, misuse of funds and material misrepresentations.

Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.

Seasonality

Demand for our hotels is affected by recurring seasonal patterns. Generally, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters. These general trends are, however, influenced by overall economic cycles and the geographic locations of our hotels.


Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
    
Recently Issued Accounting Standards

Refer to Note 3, Recently Issued2, Summary of Significant Accounting StandardsPolicies for all new recently issued accounting standards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We may be exposed to interest rate changes primarily as a result of our assumption of long-term debt in connection with our acquisitions and upon refinancing of existing debt. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we seek to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With respect to variable rate financing, we will assess interest rate risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates. Rates take into consideration general market conditions, maturity and fair value of the underlying collateral. The estimated fair value of the Company’s fixed rate debt at June 30, 20172018 and December 31, 20162017 was $537.9$492.0 million and $516.0$506.6 million, respectively.

At June 30, 2017,2018, our consolidated debt was comprised of floating and fixed interest rate debt. The fair value of our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have been borrowed at the date presented, at then current market interest rates. The following table provides information about the maturities of our financial instruments as of June 30, 20172018 that are sensitive to changes in interest rates (dollars in thousands):


2017 2018 2019 2020 2021 2022 Thereafter Total/ Weighted Average Fair Value2018 2019 2020 2021 2022 2023 Thereafter Total/ Weighted Average Fair Value
Floating rate:
 
 
 
 
   
 
 

 
 
 
 
   
 
 
Debt
 
 $45,000
 $
 
 
 
 $45,000
 $45,000

 
 
 
 $27,000
 
 
 $27,000
 $27,000
Average interest rate (1)
 
 3.51% 
 
 
 
 3.51% 

 
 
 
 3.96% 
 
 3.96% 
Fixed rate:
 
 
 
 
   
 
 

 
 
 
 
   
 
 
Debt$2,262 $5,374 $7,340 $9,899
 $22,308
 $10,350
 $472,961 $530,494
 $537,912
$2,610 $6,992 $9,536 $21,945
 $9,954
 $142,509
 $312,483 $506,029
 $492,047
Average interest rate4.76% 4.69% 4.68% 4.67% 5.25% 4.62% 4.62% 4.65% 
4.71% 4.70% 4.68% 5.26% 4.63% 4.66% 4.62% 4.66% 
(1) Weighted average interest rate based on borrowings at LIBOR of 1.23%2.05% plus a margin of 1.95%1.65% and prime rate of 4.25%5.0% plus a margin of 0.95%0.65% at June 30, 20172018.
We estimate that a hypothetical 100 basis points increase on the variable interest rate would result in additional interest expense of approximately $0.5$0.3 million annually. This assumes that the amount outstanding under our floating rate debt remains $45.0$27.0 million, the balance as of June 30, 2017.2018.    

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The nature of the operations of the Company's hotels exposes those hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. IHM is currently a defendant in two (2) related class action lawsuits pending in the Santa Clara County Superior Court. The first class action lawsuit was filed on October 21, 2016 under the title Ruffy, et al, v. Island Hospitality Management, LLC, et al. Case No. 16-CV-301473 and the second class action was filed on March 21, 2018 under the title Doonan, et al, v. Island Hospitality Management, LLC, et al. Case No. 18-CV-325187. The class actions relate to hotels operated by IHM in the state of California and owned by affiliates of the Company and the NewINK JV, and/or certain third parties. The complaints allege various wage and hour law violations based on alleged misclassification of certain hotel managerial staff and violation of certain California statutes regarding incorrect information contained on employee paystubs. The plaintiffs seek injunctive relief, money damages, penalties, and interest. None of the potential classes has been certified and we are defending our case vigorously. As of June 30, 2018, included in accounts payable is not presently subject to any material litigation nor,$0.2 million which represents an estimate of the Company’s total exposure to the Company’s knowledge,litigation and is any material litigation threatened againstalso its estimated maximum possible loss that the Company or its properties.may incur.
Item 1A. Risk Factors.
    
There have been no material changes in the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of this report:
 
Exhibit
Number
  Description of Exhibit
   
   
 
Articles of Amendment and Restatement of Chatham Lodging Trust (1)
   
 
Second Amended and Restated Bylaws of Chatham Lodging Trust(2)
   
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1*  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS  XBRL Instance Document
   
101.SCH  XBRL Taxonomy Extension Schema Document
   
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB  XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document
 
*Furnished herewith. Such certification shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
  
(1)Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the SEC on February 29, 2016 (File No. 001-34693).
  
(2)Incorporated by reference to Exhibit 3.13.2 to the Company's Current Report on Form 8-K filed with the SEC on April 21, 2015 (File No. 001-34693).


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   CHATHAM LODGING TRUST
    
Dated:August 2, 20171, 2018 By: /s/ JEREMY B. WEGNER
   Jeremy B. Wegner
   Senior Vice President and Chief Financial Officer
   (Principal Financial and Accounting Officer and duly authorized officer of the registrant)

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