| Merger of CWI 1 and CWI 2 | Merger of CWI 1 and CWI 2 On April 13, 2020, the Merger of Merger Sub, with and into CWI 1, was completed in an all-stock transaction to create Watermark Lodging Trust, Inc. The Merger was effected pursuant to the Agreement and Plan of Merger, dated as of October 22, 2019 (as amended, the “Merger Agreement”), by and among CWI 2, CWI 1 and Merger Sub. In accordance with the Merger Agreement, at the effective time of the Merger (the “effective time”) each issued and outstanding share of CWI 1’s common stock (or fraction thereof), $0.001 par value per share (“CWI 1 common stock”), was converted into the right to receive 0.9106 shares (the “exchange ratio”) of WLT Class A common stock, $0.001 par value per share (“WLT Class A common stock”). Also at the effective time, all CWI 1 restricted stock units (“RSUs”) outstanding and unvested immediately prior to the effective time were converted into a WLT RSU with respect to a whole number of shares of WLT Class A common stock equal to (i) the number of shares of CWI 1 common stock subject to such unvested CWI 1 RSU, multiplied by (ii) the exchange ratio. Immediately following the effective time of the Merger, the internalization of the management of the Company (the “Internalization”) was consummated pursuant to the Internalization Agreement, dated as of October 22, 2019 (as amended, the “Internalization Agreement”), by and among CWI 1, CWI OP, LP, the Operating Partnership, WPC, Carey Watermark Holdings, LLC, CLA Holdings, LLC, Carey REIT II, Inc., WPC Holdco LLC, Carey Watermark Holdings 2, LLC, the Advisor, Watermark Capital, the CWI 1 Subadvisor and CWA2, LLC (the “CWI 2 Subadvisor” and together with CWI 1 Subadvisor, the “Subadvisors”). In accordance with the Internalization Agreement, CWI OP, LP and the Operating Partnership redeemed the special general partnership interests held by Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC in CWI OP, LP and the Operating Partnership, respectively (the “Redemption”). As consideration for the Redemption and the other transactions contemplated by the Internalization Agreement, WLT or the Operating Partnership (as applicable) issued equity consisting of (x) 2,840,549 shares of CWI 2 Class A common stock, to affiliates of WPC, (y) 1,300,000 shares of WLT Series A preferred stock, $0.001 par value per share, to affiliates of WPC, with a liquidation preference of $50.00 per share ( $65,000,000 in the aggregate), and (z) 2,417,996 limited partnership units in the Operating Partnership, to affiliates of Watermark Capital. Following the Redemption, Carey Watermark Holdings, LLC and Carey Watermark Holdings 2, LLC have no further liability or obligation pursuant to the limited partnership agreements of CWI OP, LP or the Operating Partnership, respectively. Immediately following the Redemption, the existing advisory agreements, as amended, between CWI 1 or CWI 2 (as applicable) and the Advisor, and the existing sub‑advisory agreements, as amended, between the Advisor and the Subadvisors (as applicable), were automatically terminated. The secured credit facilities entered into by CWI OP, LP or the Operating Partnership (as applicable) as borrower, and CWI 1 or CWI 2 (as applicable) as guarantor, with WPC as lender, each matured at the time of the expiration of such existing advisory agreements and the applicable loan agreements and loan documents were terminated. Neither CWI 1 nor CWI 2 had any outstanding obligations under the respective facilities. The Merger was accounted for as a business combination in accordance with current authoritative accounting guidance. CWI 1 was the accounting acquirer in the Merger as (i) CWI 1’s pre-merger stockholders has a majority of the voting power in the Company after the Merger and (ii) CWI 1 was significantly larger than CWI 2 when considering assets and revenues. As CWI 1 was the accounting acquirer while CWI 2 was the legal acquirer, the Merger was accounted for as a reverse acquisition, and therefore, the historical financial information included in the Company’s financial statements as of any date, or for any periods prior to April 13, 2020, represents the pre-merger information of CWI 1. The financial statements of the Company, as set forth herein, represent a continuation of the financial information of CWI 1 as the accounting acquirer, except that the equity structure of WLT is adjusted to reflect the equity structure of the legal acquirer, CWI 2, including for comparative periods, by applying the exchange ratio of 0.9106 . As a result of the Merger, the Company acquired an ownership interest in the following 12 hotel properties: Hotels State Number of Rooms % Acquired Hotel Type Charlotte Marriott City Center NC 446 100% Full-Service Courtyard Nashville Downtown TN 192 100% Select-Service Embassy Suites by Hilton Denver-Downtown/Convention Center CO 403 100% Full-Service Le Méridien Arlington VA 154 100% Full-Service Marriott Sawgrass Golf Resort & Spa (a) FL 514 50% Resort Renaissance Atlanta Midtown Hotel GA 304 100% Full-Service Ritz-Carlton Bacara, Santa Barbara (a) CA 358 60% Resort Ritz-Carlton Key Biscayne (b) FL 443 19.3% Resort Ritz-Carlton San Francisco CA 336 100% Full-Service San Diego Marriott La Jolla CA 376 100% Full-Service San Jose Marriott CA 510 100% Full-Service Seattle Marriott Bellevue WA 384 100% Full-Service 4,420 ___________ (a) Upon closing of the Merger, the Company owns 100% of this hotel. (b) Upon closing of the Merger, the Company owns 66.7% of this hotel. As the Merger is accounted for as a reverse acquisition, the fair value of the consideration transferred is measured based upon the number of shares of CWI 1 common stock, as the accounting acquirer, would theoretically have to issue to the stockholders of CWI 2 to achieve the same ratio of ownership in the combined company upon completion of the Merger and applying the fair value per implied share of CWI 1 common stock issued in consideration. As a result, the implied shares of CWI 1 common stock issued in consideration was computed based on the number of outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger divided by the exchange ratio of 0.9106 . (Dollars in thousands, except per share amounts) Total Merger Consideration Outstanding shares of CWI 2 Class A and Class T common stock prior to the Merger 94,480,247 Exchange ratio 0.9106 Implied shares of CWI 1 common stock issued in consideration 103,756,037 Fair value per implied share of CWI 1 common stock issued in consideration $ 4.83271 Fair value of implied shares of CWI 1 common stock issued in consideration 501,423 Fair value of noncontrolling interest acquired (39,414 ) Fair value of purchase consideration $ 462,009 The following tables present a summary of assets acquired and liabilities assumed in this business combination, at the date of acquisition; as well as and revenues and earnings thereon, from the date of acquisition through June 30, 2020 (in thousands): Preliminary Purchase Price Allocation Assets Net investments in hotels $ 1,556,383 Operating lease right-of-use assets 974 Cash and cash equivalents 71,881 Intangible assets 10,200 Restricted cash 37,594 Accounts receivable, net 25,664 Other assets 15,593 Total Assets 1,718,289 Liabilities Non-recourse debt, net (1,002,753 ) Accounts payable, accrued expenses and other liabilities (97,843 ) Operating lease liabilities (1,874 ) Due to related parties and affiliates (1,520 ) Total Liabilities (1,103,990 ) Total Identifiable Net Assets 614,299 Fair value of CWI 1's equity interests in jointly-owned investments with CWI 2 prior to the merger (73,594 ) Bargain purchase gain (78,696 ) Fair value of purchase consideration $ 462,009 From April 13, 2020 through June 30, 2020 Revenues $ 9,947 Net loss $ (51,473 ) We recognized a bargain purchase gain of $78.7 million in connection with the Merger resulting from the estimated fair values of the assets acquired net of liabilities assumed exceeding the consideration paid. The estimated fair values for the assets acquired and the liabilities assumed are preliminary and are subject to change during the measurement period as additional information related to the inputs and assumptions used in determining the fair value of the assets and liabilities becomes available. Subsequent adjustments to the preliminary purchase price allocation are not expected to have a material impact to the Company's consolidated financial statements. The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the noncontrolling interests acquired: Net investments in hotels — The Company estimated the fair values of the land, buildings and site improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the income capitalization and sales comparison approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as capitalization rates, discount rates, capital expenditures and net operating income at the respective hotel properties, including estimates of future income growth. Intangible assets — The Company estimated the fair market value of the trade name through a relief-from-royalty discounted cash flow method whereby the Company valued the avoided third-party license payment for the right to employ the asset to earn benefits. Our intangibles are included in Intangible assets, net in the consolidated financial statements. Amortization of intangibles is included in Depreciation and amortization in the consolidated financial statements. In connection with the Merger, we have recorded intangibles comprised as follows (life in years, dollars in thousands): Weighted-Average Life Amount Amortizable Intangible Assets Trade name 8.0 $ 9,400 In-place leases 3.2 800 Total intangible assets $ 10,200 Non-recourse debt — We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate, which are Level 3 inputs in the fair value hierarchy. We recognized a discount of approximately $69.5 million on the mortgage loans assumed in the Merger, which is included in non-recourse debt, net in the consolidated balance sheet. The discount is amortized over the remaining terms of the respective debt instruments as adjustments to interest expense in the consolidated statements of operations. Noncontrolling interest — The Company estimated the fair value of the consolidated joint venture by using the same valuation methodologies for the investment in hotel properties noted above. The Company then recognized the fair value of the noncontrolling interest in the consolidated joint venture based on the joint venture partner's ownership interest in the consolidated joint venture. This valuation methodology is based on Level 3 inputs and assumptions in the fair value hierarchy. Cash and cash equivalents, restricted cash, accounts receivable, net, other assets, accounts payable, accrued expenses and other liabilities, and due to related parties and affiliates —The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities. Transaction costs are costs incurred in connection with the Merger and related transactions and included legal, accounting, financial advisory and other transaction costs. These costs were expensed as incurred in the consolidated statements of operations. (Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Transaction costs $ 16,539 $ 500 $ 18,349 $ 755 Pro Forma Financial Information The following unaudited consolidated pro forma financial information presents the results of operations as if the Merger had taken place on January 1, 2019. The unaudited consolidated pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Merger had taken place on January 1, 2019, nor is it indicative of the results of operations for future periods. The unaudited consolidated pro forma financial information is as follows (in thousands): (Dollars in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Pro forma total revenues $ 20,774 $ 283,021 $ 221,569 $ 549,520 Pro forma net (loss) income $ (106,618 ) $ 1,409 $ (269,143 ) $ 64,389 Pro forma net (loss) income attributable to Stockholders (a) $ (104,494 ) $ (380 ) $ (266,732 ) $ 59,308 Pro forma (loss) income per Class A share: Net (loss) income attributable to Stockholders $ (76,520 ) $ (199 ) $ (195,335 ) $ 43,783 Basic and diluted pro forma weighted-average shares outstanding 167,565,919 166,008,784 167,565,562 165,803,381 Basic and diluted pro forma (loss) income per share $ (0.46 ) $ — $ (1.17 ) $ 0.26 Pro forma (loss) income per Class T share: Net (loss) income attributable to Stockholders $ (27,974 ) $ (181 ) $ (71,397 ) $ 15,525 Basic and diluted pro forma weighted-average shares outstanding 61,175,258 59,872,699 61,175,258 59,687,602 Basic and diluted pro forma (loss) income per share $ (0.46 ) $ — $ (1.17 ) $ 0.26 __________ (a) The pro forma net income attributable to Stockholders through the six months ended June 30, 2020 reflects the following income and expenses related to the Merger as if the Merger had taken place on January 1, 2019: (i) bargain purchase gain of $78.7 million , (ii) transaction costs of $27.4 million through June 30, 2020 and (iii) net gain on change in control of interests of $22.3 million . Compensation Mr. Medzigian, the Company’s Chief Executive Officer, entered into an employment agreement with WLT that took effect at the closing of the Merger, effected pursuant to the Employment Agreement, dated as of October 22, 2019, pursuant to which Mr. Medzigian is entitled to receive, among other things, an annual base salary of $775,000 , an annual cash bonus opportunity equal to 150% of his annual base salary based on performance goals, and an award of RSUs of WLT common stock equal to $6.0 million . Mr. Medzigian subsequently entered into a letter agreement with CWI 2 to confirm his agreement to reduce by 50% the pro rata portion of Mr. Medzigian’s annual base salary payable by the Company through July 15, 2020. Mr. Medzigian agreed to continue to reduce his annual base salary payable by the Company, with a reduction of 25% from July 15, 2020 through September 30, 2020. |
