AHT 2014 Q3 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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: 001-31775

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland
 
86-1062192
(State or other jurisdiction of incorporation or organization)
 
(IRS employer identification number)
 
 
 
14185 Dallas Parkway, Suite 1100
 
 
Dallas, Texas
 
75254
(Address of principal executive offices)
 
(Zip code)

(972) 490-9600
(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. þ 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). þ 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 (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer
þ
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value per share
 
89,444,134
(Class)
 
Outstanding at November 5, 2014


ASHFORD HOSPITALITY TRUST, INC
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

Insert Title Here
PART I. FINANCIAL INFORMATION
 
 
PART II. OTHER INFORMATION
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS (Unaudited)

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
 
September 30, 2014
 
December 31, 2013
Assets
 
Cash and cash equivalents
$
280,574

 
$
128,780

Marketable securities
44,273

 
29,601

Total cash, cash equivalents and marketable securities
324,847

 
158,381

Investments in hotel properties, net
2,143,642

 
2,164,389

Restricted cash
107,356

 
61,498

Accounts receivable, net of allowance of $274 and $242, respectively
29,153

 
21,791

Inventories
2,118

 
1,946

Note receivable, net of allowance of $7,627 and $7,937, respectively
3,509

 
3,384

Investment in unconsolidated entities
200,994

 
195,545

Deferred costs, net
14,453

 
10,155

Prepaid expenses
11,151

 
7,519

Derivative assets, net
413

 
19

Other assets
4,674

 
4,303

Due from Ashford Prime OP, net
3,815

 
13,042

Due from affiliates
1,748

 
1,302

Due from related parties
1,200

 
—

Due from third-party hotel managers
14,635

 
33,728

Total assets
$
2,863,708

 
$
2,677,002

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Indebtedness
$
1,959,608

 
$
1,818,929

Capital leases payable
—

 
28

Accounts payable and accrued expenses
93,536

 
70,683

Dividends payable
21,889

 
20,735

Unfavorable management contract liabilities
5,824

 
7,306

Due to related party, net
1,461

 
270

Due to third-party hotel managers
1,629

 
958

Liabilities associated with marketable securities and other
4,302

 
3,764

Other liabilities
5,103

 
1,286

Total liabilities
2,093,352

 
1,923,959

 
 
 
 
Redeemable noncontrolling interests in operating partnership
177,743

 
134,206

 
 
 
 
Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A Cumulative Preferred Stock, 1,657,206 shares issued and outstanding at September 30, 2014 and December 31, 2013
17

 
17

Series D Cumulative Preferred Stock, 9,468,706 shares issued and outstanding at September 30, 2014 and December 31, 2013
95

 
95

Series E Cumulative Preferred Stock, 4,630,000 shares issued and outstanding at September 30, 2014 and December 31, 2013
46

 
46

Common stock, $0.01 par value, 200,000,000 shares authorized, 124,896,765 shares issued, 89,449,342 and 80,565,563 shares outstanding at September 30, 2014 and December 31, 2013, respectively
1,249

 
1,249

Additional paid-in capital
1,729,338

 
1,652,743

Accumulated other comprehensive loss
(110
)
 
(197
)
Accumulated deficit
(1,013,529
)
 
(896,110
)
Treasury stock, at cost, 35,447,423 and 44,331,202 shares at September 30, 2014 and December 31, 2013, respectively
(125,700
)
 
(140,054
)
Total shareholders’ equity of the Company
591,406

 
617,789

Noncontrolling interests in consolidated entities
1,207

 
1,048

Total equity
592,613

 
618,837

Total liabilities and equity
$
2,863,708

 
$
2,677,002

See Notes to Consolidated Financial Statements.

2
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
REVENUE
 
 
 
Rooms
$
165,623

 
$
197,067

 
$
491,542

 
$
586,276

Food and beverage
25,268

 
34,444

 
82,521

 
117,328

Other hotel revenue
7,055

 
10,364

 
20,088

 
28,509

Total hotel revenue
197,946

 
241,875

 
594,151

 
732,113

Advisory services
3,127

 
—

 
9,266

 
—

Other
1,072

 
149

 
3,213

 
392

Total Revenue
202,145

 
242,024

 
606,630

 
732,505

EXPENSES
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Rooms
37,547

 
45,079

 
108,640

 
132,310

Food and beverage
18,628

 
25,860

 
57,330

 
80,651

Other expenses
64,349

 
74,275

 
195,469

 
215,923

Management fees
7,838

 
9,888

 
23,734

 
30,467

Total hotel operating expenses
128,362

 
155,102

 
385,173

 
459,351

Property taxes, insurance, and other
10,451

 
12,474

 
29,052

 
36,385

Depreciation and amortization
28,421

 
32,777

 
81,262

 
98,099

Impairment charges
(105
)
 
(101
)
 
(310
)
 
(296
)
Transaction costs
533

 
126

 
616

 
1,296

Corporate, general, and administrative
15,104

 
13,465

 
47,290

 
42,680

Total Operating Expenses
182,766

 
213,843

 
543,083

 
637,515

OPERATING INCOME
19,379

 
28,181

 
63,547

 
94,990

Equity in earnings (loss) of unconsolidated entities
2,831

 
(10,105
)
 
6,794

 
(14,626
)
Interest income
27

 
12

 
45

 
61

Other income
2,564

 
314

 
5,841

 
6,446

Interest expense and amortization of loan costs
(29,449
)
 
(36,625
)
 
(85,896
)
 
(108,031
)
Write-off of loan costs and exit fees
(8,319
)
 
—

 
(10,353
)
 
(1,971
)
Unrealized gain (loss) on marketable securities
(2,875
)
 
257

 
(3,818
)
 
2,039

Unrealized loss on derivatives
(70
)
 
(817
)
 
(680
)
 
(7,177
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(15,912
)
 
(18,783
)
 
(24,520
)
 
(28,269
)
Income tax expense
(292
)
 
(619
)
 
(820
)
 
(1,688
)
LOSS FROM CONTINUING OPERATIONS
(16,204
)
 
(19,402
)
 
(25,340
)
 
(29,957
)
Gain on sale of hotel property, net of tax
—

 
—

 
3,491

 
—

NET LOSS
(16,204
)
 
(19,402
)
 
(21,849
)
 
(29,957
)
Loss from consolidated entities attributable to noncontrolling interests
124

 
175

 
146

 
890

Net loss attributable to redeemable noncontrolling interests in operating partnership
2,585

 
2,892

 
4,234

 
5,152

NET LOSS ATTRIBUTABLE TO THE COMPANY
(13,495
)
 
(16,335
)
 
(17,469
)
 
(23,915
)
Preferred dividends
(8,490
)
 
(8,490
)
 
(25,471
)
 
(25,471
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(21,985
)
 
$
(24,825
)
 
$
(42,940
)
 
$
(49,386
)
 
 
 
 
 
 
 
 
LOSS PER SHARE - BASIC AND DILUTED:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net loss attributable to common shareholders
$
(0.24
)
 
$
(0.31
)
 
$
(0.50
)
 
$
(0.69
)
Weighted average common shares outstanding – basic
90,322

 
79,898

 
86,961

 
72,068

Diluted:
 
 
 
 
 
 
 
Net loss attributable to common shareholders
$
(0.24
)
 
$
(0.31
)
 
$
(0.50
)
 
$
(0.69
)
Weighted average common shares outstanding – diluted
90,322

 
79,898

 
86,961

 
72,068

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.12

 
$
0.12

 
$
0.36

 
$
0.36

 
 
 
 
 
 
 
 
Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Net loss attributable to the Company
$
(13,495
)
 
$
(16,335
)
 
$
(17,469
)
 
$
(23,915
)
Preferred dividends
(8,490
)
 
(8,490
)
 
(25,471
)
 
(25,471
)
Net loss attributable to common shareholders
$
(21,985
)
 
$
(24,825
)
 
$
(42,940
)
 
$
(49,386
)
See Notes to Consolidated Financial Statements.

3
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(16,204
)
 
$
(19,402
)
 
$
(21,849
)
 
$
(29,957
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized loss on derivatives
—

 
(2
)
 
—

 
(4
)
Reclassification to interest expense
—

 
29

 
100

 
53

Total other comprehensive income
—

 
27

 
100

 
49

Comprehensive loss
(16,204
)
 
(19,375
)
 
(21,749
)
 
(29,908
)
Less: Comprehensive loss attributable to noncontrolling interests in consolidated entities
124

 
175

 
146

 
890

Less: Comprehensive loss attributable to redeemable noncontrolling interests in operating partnership
2,585

 
2,888

 
4,221

 
5,145

Comprehensive loss attributable to the Company
$
(13,495
)
 
$
(16,312
)
 
$
(17,382
)
 
$
(23,873
)
See Notes to Consolidated Financial Statements.

4
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited, in thousands)
 
Preferred Stock
 
 
 
Additional
Paid In
Capital
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
Noncontrolling
Interests In
Consolidated
Entities
 
 
 

Noncontrolling
Interests in
Operating
Partnership
 
Series A
 
Series D
 
Series E
 
Common Stock
 
 
Accumulated
Deficit
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Total
 
Balance at January 1, 2014
1,657

 
$
17

 
9,469

 
$
95

 
4,630

 
$
46

 
124,897

 
$
1,249

 
$
1,652,743

 
$
(896,110
)
 
$
(197
)
 
(44,331
)
 
$
(140,054
)
 
$
1,048

 
$
618,837

 
$
134,206

Purchases of treasury shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(41
)
 
(458
)
 
—

 
(458
)
 
—

Equity-based compensation
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,413

 
—

 
—

 
—

 
—

 
—

 
2,413

 
14,551

Forfeitures of restricted shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
32

 
—

 
—

 
(8
)
 
(20
)
 
—

 
12

 
—

Issuance of restricted shares/units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(993
)
 
—

 
—

 
423

 
993

 
—

 
—

 
50

Reissuance of treasury shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
72,243

 
—

 
—

 
8,350

 
13,597

 
—

 
85,840

 
—

Dividends declared- common shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(31,161
)
 
—

 
—

 
—

 
—

 
(31,161
)
 
—

Dividends declared- preferred shares- Series A
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,657
)
 
—

 
—

 
—

 
—

 
(2,657
)
 
—

Dividends declared- preferred shares- Series D
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(15,001
)
 
—

 
—

 
—

 
—

 
(15,001
)
 
—

Dividends declared – preferred shares- Series E
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,813
)
 
—

 
—

 
—

 
—

 
(7,813
)
 
—

Reclassification to interest expense
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
87

 
—

 
—

 
—

 
87

 
13

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(255
)
 
(255
)
 
(8,050
)
Sale of consolidated noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
640

 
—

 
—

 
—

 
—

 
560

 
1,200

 
—

Redemption/conversion of operating partnership units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,574

 
(401
)
 
—

 
160

 
242

 
—

 
1,415

 
(1,415
)
Redemption value adjustment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(42,350
)
 
—

 
—

 
—

 
—

 
(42,350
)
 
42,350

Unvested operating partnership units reclassified to equity
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(272
)
 
—

 
—

 
—

 
—

 
—

 
(272
)
 
272

Deferred compensation to be settled in shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
958

 
(567
)
 
—

 
—

 
—

 
—

 
391

 
—

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(17,469
)
 
—

 
—

 
—

 
(146
)
 
(17,615
)
 
(4,234
)
Balance at September 30, 2014
1,657

 
$
17

 
9,469

 
$
95

 
4,630

 
$
46

 
124,897

 
$
1,249

 
$
1,729,338

 
$
(1,013,529
)
 
$
(110
)
 
(35,447
)
 
$
(125,700
)
 
$
1,207

 
$
592,613

 
$
177,743

See Notes to Consolidated Financial Statements.

5
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash Flows from Operating Activities
 
Net loss
$
(21,849
)
 
$
(29,957
)
Adjustments to reconcile net loss to net cash flow provided by operating activities:
 
 
 
Depreciation and amortization
81,262

 
98,099

Impairment charges
(310
)
 
(296
)
Amortization of loan costs, write-off of loan costs, and exit fees
15,901

 
7,702

Equity in (earnings) loss of unconsolidated entities
(6,794
)
 
14,626

Dividends from Ashford Prime OP
746

 
—

Income from financing derivatives
—

 
(6,215
)
Gain on sale of hotel property
(3,658
)
 
(76
)
Realized and unrealized gains on marketable securities
(1,535
)
 
(1,899
)
Purchases of marketable securities
(91,749
)
 
(15,525
)
Sales of marketable securities
79,201

 
15,287

Net settlement of trading derivatives
(505
)
 
(861
)
Unrealized loss on derivatives
680

 
7,177

Equity-based compensation
16,964

 
17,049

Changes in operating assets and liabilities, exclusive of effect of acquisitions and disposition of hotel properties:
 
 
 
Restricted cash
(6,771
)
 
571

Accounts receivable and inventories
(6,799
)
 
3,002

Prepaid expenses and other assets
(4,564
)
 
(4,685
)
Accounts payable and accrued expenses
24,355

 
14,837

Due from affiliates
(446
)
 
(248
)
Due to/from related party
1,224

 
(2,568
)
Due to/from third-party hotel managers
19,764

 
(4,163
)
Due to/from Ashford Prime OP
(4,629
)
 
—

Other liabilities
2,381

 
(3,109
)
Net cash provided by operating activities
92,869

 
108,748

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Proceeds from payments of note receivable
185

 
184

Net proceeds from sales of hotel properties
22,882

 
307

Acquisition of hotel properties, net of cash acquired
(57,726
)
 
(88,204
)
Restricted cash related to improvements and additions to hotel properties
(39,283
)
 
—

Improvements and additions to hotel properties
(91,483
)
 
(68,958
)
Due from Ashford Prime
13,635

 
—

Payments of franchise fees
(208
)
 
—

Proceeds from property insurance
1,407

 
—

Net cash used in investing activities
(150,591
)
 
(156,671
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Borrowings on indebtedness
718,825

 
268,875

Repayments of indebtedness and capital leases
(509,152
)
 
(167,884
)
Payments of loan costs and exit fees
(20,165
)
 
(4,709
)
Payments of dividends
(63,528
)
 
(58,094
)
Purchases of treasury shares
(458
)
 
(401
)
Payments for derivatives
(661
)
 
(185
)
Cash income from derivatives
—

 
7,878

Issuance of preferred stock
—

 
244

Issuances of treasury stock
85,840

 
140,111

Distributions to noncontrolling interests in consolidated entities
(1,235
)
 
(13,489
)
Other
50

 
69

Net cash provided by financing activities
209,516

 
172,415

 
 
 
 
Net increase in cash and cash equivalents
151,794

 
124,492

Cash and cash equivalents at beginning of period
128,780

 
185,935

Cash and cash equivalents at end of period
$
280,574


$
310,427

Supplemental Cash Flow Information
 
 
 
Interest paid
$
78,508

 
$
100,217

Income taxes paid
1,027

 
1,155

Supplemental Disclosure of Non-Cash Investing and Financing Activity
 
 
 
Deferred compensation to be settled in shares
$
958

 
$
—

Dividend receivable from Ashford Prime
249

 
—

Transfer of debt to Ashford Prime
69,000

 
—

Dividends declared but not paid
21,889

 
20,734

Net other liabilities acquired
396

 
1,691

Sale of consolidated noncontrolling interest, settled subsequent to period end
1,200

 
—

See Notes to Consolidated Financial Statements.

6
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Description of Business
Ashford Hospitality Trust, Inc., together with its subsidiaries (“Ashford Trust”), is a real estate investment trust (“REIT”) focused on investing in the hospitality industry across all segments and in all methods including direct real estate, securities, equity, and debt. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership (“AHLP”), our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of Ashford Hospitality Trust, Inc., serves as the sole general partner of our operating partnership. In this report, terms such as the “Company,” “we,” “us,” or “our” refer to Ashford Hospitality Trust, Inc. and all entities included in its consolidated financial statements.
As of September 30, 2014, we owned interests in the following hotel properties (all located in the United States) and a note receivable:
•
88 consolidated hotel properties (“legacy hotel properties”), including 86 directly owned and two owned through a majority-owned investment in a consolidated entity, which represent 17,291 total rooms (or 17,264 net rooms excluding those attributable to our partners);
•
28 hotel properties owned through a 71.74% common equity interest and a 50.0% preferred equity interest in an unconsolidated entity (“PIM Highland JV”), which represent 8,084 total rooms (or 5,799 net rooms excluding those attributable to our partner);
•
10 hotel properties owned through a 14.4% interest in Ashford Hospitality Prime Limited Partnership (“Ashford Prime OP”);
•
88 hotel condominium units at WorldQuest Resort in Orlando, Florida; and
•
a mezzanine loan with a carrying value of $3.5 million.
For federal income tax purposes, we have elected to be treated as a REIT, which imposes limitations related to operating hotels. As of September 30, 2014, our 88 legacy hotel properties were leased or owned by our wholly owned subsidiaries that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated statements of operations. As of September 30, 2014, the 28 hotel properties owned by our unconsolidated joint venture, PIM Highland JV, are leased to its wholly owned subsidiary that is treated as a taxable REIT subsidiary for federal income tax purposes.
As of September 30, 2014, Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington Lodging”), which is beneficially wholly owned by Mr. Monty J. Bennett, our Chairman and Chief Executive Officer, and Mr. Archie Bennett, Jr., our Chairman Emeritus, managed 55 of our 88 legacy hotel properties, 21 of the 28 PIM Highland JV hotel properties, one of the 10 Ashford Prime OP hotel properties and WorldQuest Resort. Third-party management companies managed the remaining hotel properties.
2. Significant Accounting Policies
Basis of Presentation—The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of Ashford Hospitality Trust, Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our 2013 Annual Report to Shareholders on Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission (“SEC”) on March 3, 2014 and March 31, 2014, respectively.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The following items affect reporting comparability related to our consolidated financial statements:
•
Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
•
On November 19, 2013, we completed the spin-off of Ashford Hospitality Prime, Inc. (“Ashford Prime”) and on March 1, 2014 we completed the sale of the Pier House Resort to Ashford Prime. The results of the eight initial hotel properties that were spun-off on November 19, 2013 and are now owned by Ashford Prime, are included in our consolidated statements of operations for the three and nine months ended September 30, 2013, in accordance with the applicable accounting guidance. The results of the Pier House Resort, which we acquired on May 14, 2013 and sold on March 1, 2014, are included in our results of operations for the nine months ended September 30, 2014, until its date of sale. Because we acquired the Pier House Resort on May 14, 2013, its operating results are only included in our results of operations for the three and nine months ended September 30, 2013 since May 14, 2013.
•
On July 18, 2014, we acquired the Ashton hotel and on August 6, 2014, we acquired the Fremont Marriott Silicon Valley hotel. The results of these hotels are included in our results of operations as of their respective acquisition dates.
Use of Estimates—The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Restricted Cash—Restricted cash includes reserves for debt service, real estate taxes, and insurance, as well as excess cash flow deposits and reserves for furniture, fixtures, and equipment replacements of approximately 4% to 6% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. For purposes of the consolidated statements of cash flows, changes in restricted cash caused by using such funds for debt service, real estate taxes, and insurance are shown as operating activities. Changes in restricted cash caused by using such funds for furniture, fixtures, and equipment replacements are included in cash flows from investing activities.
Investments in Hotel Properties, net—Hotel properties are generally stated at cost. However, four hotel properties contributed upon Ashford Trust’s formation in 2003 are stated at the predecessor’s historical cost, net of impairment charges, if any, plus a partial step-up related to the acquisition of noncontrolling interests from third parties associated with certain of these properties. For hotel properties owned through our majority-owned entities, the carrying basis attributable to the partners’ minority ownership is recorded at the predecessor’s historical cost, net of any impairment charges, while the carrying basis attributable to our majority ownership is recorded based on the allocated purchase price of our ownership interests in the entities. All improvements and additions which extend the useful life of hotel properties are capitalized.
Impairment of Investments in Hotel Properties—Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property’s net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period, and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. No impairment charges were recorded for investments in hotel properties for the three and nine months ended September 30, 2014 and 2013.
Note Receivable—Mezzanine loan financing, classified as note receivable, represents a loan held for investment and intended to be held to maturity. Note receivable is recorded at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and allowance for losses when a loan is deemed to be impaired. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method over the life of the loan. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received when contractually due. Payments received on impaired nonaccrual loans are recorded as adjustments to impairment charges. No interest income was recorded for the three and nine months ended September 30, 2014 and 2013.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Variable interest entities (“VIEs”), as defined by authoritative accounting guidance, must be consolidated by their controlling interest beneficiaries if the VIEs do not effectively disperse risks among the parties involved. Our remaining mezzanine note receivable at September 30, 2014 is secured by a hotel property and is subordinate to the controlling interest in the secured hotel property. Although the note receivable is considered to be a variable interest in the entity that owns the related hotel, we are not considered to be the primary beneficiary of the hotel property as a result of holding the loan. Therefore, we do not consolidate the hotel property for which we have provided financing. We will evaluate interests in entities acquired or created in the future to determine whether such entities should be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.
Impairment of Note Receivable—We review notes receivable for impairment each reporting period. A loan is impaired when, based on current information and events, collection of all amounts recorded as assets on the balance sheet is no longer considered probable. We apply normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.
When a loan is impaired, we measure impairment based on the present value of expected cash flows discounted at the loan’s effective interest rate against the value of the asset recorded on the balance sheet. We may also measure impairment based on a loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Loan impairments are recorded as a valuation allowance and a charge to earnings. Our assessment of impairment is based on considerable management judgment and assumptions. No impairment charges were recorded during the three and nine months ended September 30, 2014 and 2013. Valuation adjustments of $105,000 and $310,000 on previously impaired notes were credited to impairment charges during the three and nine months ended September 30, 2014, respectively. Valuation adjustments of $101,000 and $296,000 on previously impaired notes were credited to impairment charges during the three and nine months ended September 30, 2013, respectively.
Investments in Unconsolidated Entities—Investments in entities in which we have ownership interests ranging from 14.4% to 71.74% are accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the entities’ net income/loss. We review the investments in our unconsolidated entities for impairment in each reporting period pursuant to the applicable authoritative accounting guidance. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. Any impairment is recorded in equity earnings (loss) in unconsolidated entities. No such impairment was recorded in the three and nine months ended September 30, 2014 and 2013.
Our investments in certain unconsolidated entities are considered to be variable interests in the underlying entities. Variable Interest Entities (“VIE”), as defined by authoritative accounting guidance, must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, (ii) an implicit financial responsibility to ensure that a VIE operates as designed, and (iii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Because we do not have the power and financial responsibility to direct the unconsolidated entities’ activities and operations, we are not considered to be the primary beneficiary of these entities on an ongoing basis and therefore such entities should not be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.
We have a 71.74% ownership interest in PIM Highland JV. We adopted the equity accounting method for our investment in the PIM Highland JV because we exercise significant influence but do not control the joint venture. Although we have the majority ownership of 71.74% in the joint venture, all the major decisions related to the joint venture, including establishment of policies and operating procedures with respect to business affairs, incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four persons with us and our partner each designating two of those persons. Our investment in PIM Highland JV had a carrying value of $145.4 million and $139.3 million at September 30, 2014 and December 31, 2013, respectively.
In connection with the spin-off of Ashford Prime on November 19, 2013, we maintained an initial 20% ownership interest in Ashford Prime OP (subsequently reduced to a 14.4% ownership interest, as of September 30, 2014, primarily as the result of an additional equity raise by Ashford Prime). We adopted the equity accounting method for our investment in Ashford Prime OP because we exercise significant influence but do not control the entity. All major decisions related to Ashford Prime OP that most significantly impact Ashford Prime OP’s economic performance, including but not limited to operating procedures with respect to business affairs and any acquisitions, dispositions, financings, restructurings or other transactions with sellers, purchasers, lenders, brokers, agents and other applicable representatives, are subject to the approval of Ashford Prime OP General Partner LLC, its general partner. Our investment in Ashford Prime had a carrying value of $55.6 million and $56.2 million at September 30, 2014 and December 31, 2013, respectively.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Assets Held for Sale and Discontinued Operations—We classify assets as held for sale when management has obtained a firm commitment from a buyer and consummation of the sale is considered probable and expected within one year. In addition, we deconsolidate a property upon transfer of title. When deconsolidating a property/subsidiary, we recognize a gain or loss in net income measured as the difference between the fair value of any consideration received, the fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated, and the carrying amount of the former property/subsidiary. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from our ongoing operations, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) we will not have any significant continuing involvement subsequent to the disposal.
Marketable Securities—Marketable securities, including U.S. treasury bills, public equity securities and equity put and call options of certain publicly traded companies, are recorded at fair value. Equity put and call options are considered derivatives. The fair value of these investments is based on the closing price as of the balance sheet date and is reported as “Marketable securities” or “Liabilities associated with marketable securities and other” in the consolidated balance sheets. On the consolidated statements of operations, net investment income, including interest income (expense), dividends, realized gains or losses and related costs incurred, is reported as a component of “Other income” while unrealized gains and losses on these investments are reported as “Unrealized gain (loss) on marketable securities.”
Revenue Recognition—Hotel revenues, including room, food, beverage, and ancillary revenues such as long-distance telephone service, laundry, parking and space rentals, are recognized when services have been rendered. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue. Advisory services are recognized when services have been rendered. The quarterly base fee is equal to 0.70% per annum of the total enterprise value of Ashford Prime, as defined in the advisory agreement, subject to certain minimums. The incentive fee is earned annually in each year that Ashford Prime’s total shareholder return exceeds the total shareholder return for Ashford Prime’s peer group, as defined in the advisory agreement. Reimbursements for overhead, travel expenses and internal audit services are recognized when services have been rendered. We also record advisory revenue for equity grants of Ashford Prime common stock and LTIP units awarded to our officers and employees in connection with providing advisory services equal to the fair value of the award that vested during the period, as well an offsetting expense in an equal amount included in “Corporate, general and administrative” expense. Interest income (including accretion of discounts on the mezzanine loan using the effective interest method) is recognized when earned. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received when contractually due. We are reimbursed by PIM Highland JV for costs associated with managing its day-to-day operations and providing corporate administrative services such as accounting, insurance, marketing support, asset management and other services. Beginning with the three months ended March 31, 2014, we changed the presentation to report such reimbursements as “Other” revenue as opposed to credits within “Corporate, general and administrative” expense. This change had no impact on our financial condition or results of operations.
Derivatives and Hedges—We use interest rate derivatives to hedge our risks and to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room). Interest rate derivatives could include swaps, caps, floors and flooridors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. We also use credit default swaps to hedge financial and capital market risk. All of our derivatives are subject to master-netting settlement arrangements and the credit default swaps are subject to credit support annexes. For credit default swaps, cash collateral is posted by us as well as our counterparty. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral.
All derivatives are recorded at fair value in accordance with the applicable authoritative accounting guidance. Interest rate derivatives and credit default swaps are reported as “Derivative assets, net” or “Liabilities associated with marketable securities and other” in the consolidated balance sheets. Accrued interest on non-hedge designated interest rate derivatives is included in “Accounts receivable, net” in the consolidated balance sheets. For interest rate derivatives designated as cash flow hedges:
a)
the effective portion of changes in fair value is initially reported as a component of “Accumulated other comprehensive income (loss)” (“OCI”) in the equity section of the consolidated balance sheets and reclassified to interest expense in the consolidated statements of operations in the period during which the hedged transaction affects earnings, and
b)
the ineffective portion of changes in fair value is recognized directly in earnings as “Unrealized gain (loss) on derivatives” in the consolidated statements of operations. For the three and nine months ended September 30, 2014 and 2013 there was no ineffectiveness.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

For non-hedge designated interest rate derivatives and credit default swaps, changes in fair value are recognized in earnings as “Unrealized loss on derivatives” in the consolidated statements of operations.
Income Taxes—As a REIT, we generally are not subject to federal corporate income tax on the portion of our net income (loss) that does not relate to taxable REIT subsidiaries. However, Ashford TRS is treated as a taxable REIT subsidiary for federal income tax purposes. In accordance with authoritative accounting guidance, we account for income taxes related to Ashford TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, the analysis utilized by us in determining our deferred tax asset valuation allowance involves considerable management judgment and assumptions.
Recently Issued Accounting Standards—In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. The update also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. Upon adoption of this standard, we will be required to evaluate whether a disposal meets the discontinued operations requirements under ASU 2014-08. We will make the additional disclosures upon adoption. Upon adoption, we anticipate that the operations of sold hotel properties through the date of their disposal will be included in continuing operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model, which requires a company to recognize revenue to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The update will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 is effective in fiscal periods beginning after December 15, 2016. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management's responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure requirements. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We do not expect the adoption of this standard will have an impact on our financial position, results of operations or cash flows.
3. Investments in Hotel Properties, net
Investments in hotel properties, net consisted of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
Land
$
359,848

 
$
410,148

Buildings and improvements
2,122,440

 
2,071,811

Furniture, fixtures, and equipment
202,256

 
166,193

Construction in progress
18,187

 
11,956

Condominium properties
12,241

 
12,442

Total cost
2,714,972

 
2,672,550

Accumulated depreciation
(571,330
)
 
(508,161
)
Investments in hotel properties, net
$
2,143,642

 
$
2,164,389

Acquisitions
On July 18, 2014, we acquired a 100% interest in the Ashton hotel in Fort Worth, Texas (“Ashton”) for total consideration of $8.0 million. The acquisition was funded with cash, and we subsequently borrowed $5.5 million, secured by a mortgage on the

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

property. We have allocated the assets acquired and liabilities assumed on a preliminary basis using the estimated fair value information currently available. We are in the process of evaluating the values assigned to investment in hotel properties and property level working capital balances. This valuation is considered a Level 3 valuation technique. Thus, the balances reflected below are subject to change and could result in adjustments. Any change to the amounts recorded within the investments in hotel properties will also impact depreciation and amortization expense.
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):
Land
$
800

Buildings and improvements
6,687

Furniture, fixtures, and equipment
500

 
7,987

Net other assets and liabilities
(66
)
The results of operations of the hotel property have been included in our results of operations since July 18, 2014. For both the three and nine months ended September 30, 2014, we have included total revenue of $551,000 and net loss of $14,000 in our consolidated statements of operations.
On July 31, 2014, to fund a portion of the acquisition of the Ashton hotel, we completed the financing of a $5.5 million mortgage loan. The mortgage loan bears interest at a rate of LIBOR + 3.75% (with a .25% LIBOR floor) for the first 18 months and a fixed rate of 4.0% thereafter. The stated maturity is July 31, 2019, with no extension options. The mortgage loan is secured by the Ashton hotel.
On August 6, 2014, we acquired a 100% interest in the Fremont Marriott Silicon Valley hotel in Fremont, California (“Fremont”) for total consideration of $50.0 million. The acquisition was funded with proceeds from a $37.5 million non-recourse mortgage loan and cash. We have allocated the assets acquired and liabilities assumed on a preliminary basis using the estimated fair value information currently available. We are in the process of evaluating the values assigned to investment in hotel properties and property level working capital balances. This valuation is considered a Level 3 valuation technique. Thus, the balances reflected below are subject to change and could result in adjustments. Any change to the amounts recorded within the investments in hotel properties will also impact depreciation and amortization expense.
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):
Land
$
5,800

Buildings and improvements
41,100

Furniture, fixtures, and equipment
3,100

 
50,000

Net other assets and liabilities
(261
)
The results of operations of the hotel property have been included in our results of operations since August 6, 2014. For both the three and nine months ended September 30, 2014, we have included total revenue of $3.2 million and net income of $150,000 in our consolidated statements of operations.
On August 6, 2014, to fund a portion of the acquisition of the Fremont hotel, we completed the financing of a $37.5 million mortgage loan. The mortgage loan bears interest at a rate of LIBOR + 4.20%. The stated maturity is August 6, 2016, with three one-year extension options. The mortgage loan is secured by the Fremont Marriott Silicon Valley hotel.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The following table reflects the unaudited pro forma results of operations as if both acquisitions had occurred and the applicable indebtedness was incurred on January 1, 2013, and the removal of $605,000 of non-recurring transaction costs directly attributable to the transactions for both the three and nine months ended September 30, 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenue
$
204,059

 
$
247,350

 
$
620,232

 
$
747,372

Net income (loss)
(15,642
)
 
(19,966
)
 
(21,498
)
 
(32,137
)
4. Note Receivable
As of September 30, 2014 and December 31, 2013, we had one mezzanine loan receivable with a net carrying value of $3.5 million and $3.4 million, respectively, net of a valuation allowance of $7.6 million and $7.9 million, respectively. This note is secured by one hotel property, bears interest at a rate of 6.09%, and matures in 2017. All required payments on this loan are current. Ongoing payments are treated as reductions of carrying value with related valuation allowance adjustments recorded as credits to impairment charges.
5. Investment in Unconsolidated Entities
We hold a 71.74% common equity interest and a $25.0 million, or 50%, preferred equity interest earning an accrued but unpaid 15% annual return with priority over common equity distributions in PIM Highland JV, a 28-hotel portfolio venture. Although we have majority ownership in PIM Highland JV, all major decisions related to the joint venture, including establishment of policies and operating procedures with respect to business affairs and incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four persons with us and our partner each designating two of those persons. As a result, we utilize the equity accounting method with respect to PIM Highland JV, which had a carrying value of $145.4 million and $139.3 million at September 30, 2014 and December 31, 2013, respectively.
Mortgage and mezzanine loans securing PIM Highland JV are non-recourse to the borrowers, except for customary exceptions or carve-outs that trigger recourse liability to the borrowers in certain limited instances. Recourse obligations typically include only the payment of costs and liabilities suffered by the lenders as a result of the occurrence of certain bad acts on the part of the borrower. However, in certain cases, the carve-outs could trigger recourse obligations on the part of the borrower with respect to repayment of all or a portion of the outstanding principal amount of the loans. We have entered into customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of the borrowers that result from non-recourse carve-outs (which include, but are not limited to, fraud, misrepresentation, willful conduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities). In the opinion of management, none of these guaranty agreements, either individually or in the aggregate, are likely to have a material adverse effect on our business, results of operations, or financial condition.
The following tables summarize the consolidated balance sheets as of September 30, 2014 and December 31, 2013 and the consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 of the PIM Highland JV (in thousands):
PIM Highland JV
Condensed Consolidated Balance Sheets
 
September 30, 2014
 
December 31, 2013
Total assets
$
1,400,684

 
$
1,390,782

Total liabilities
1,172,636

 
1,173,841

Members’ equity
228,048

 
216,941

Total liabilities and members’ equity
$
1,400,684

 
$
1,390,782

 
 
 
 
Our ownership interest in PIM Highland JV
$
145,405

 
$
139,302


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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

PIM Highland JV
Condensed Consolidated Statements of Operations
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenue
$
118,659

 
$
104,226

 
$
353,562

 
$
324,762

Total expenses
(99,074
)
 
(100,422
)
 
(294,740
)
 
(292,487
)
Operating income
19,585

 
3,804

 
58,822

 
32,275

Interest income and other
17

 
14

 
43

 
55

Interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees
(14,570
)
 
(16,238
)
 
(44,904
)
 
(48,089
)
Other expenses
—

 
—

 
(44
)
 
—

Income tax expense
(1,163
)
 
(881
)
 
(2,816
)
 
(2,379
)
Net income (loss)
$
3,869

 
$
(13,301
)
 
$
11,101

 
$
(18,138
)
Our equity in earnings (loss) of PIM Highland JV
$
2,128

 
$
(10,105
)
 
$
6,102

 
$
(14,626
)
On June 17, 2013, we announced that our Board of Directors had approved a plan to spin-off an 80% ownership interest in an 8-hotel portfolio, totaling 3,146 rooms (2,912 net rooms excluding those attributable to our partners), to holders of our common stock in the form of a taxable special distribution. The distribution was comprised of common stock in Ashford Prime, a newly formed company into which we contributed the portfolio interests. The distribution was made on November 19, 2013, on a pro rata basis to holders of our common stock as of November 8, 2013, with each of our common shareholders receiving one share of Ashford Prime common stock for every five shares of our common stock held by such stockholder as of the close of business on November 8, 2013. We maintained a 20% ownership interest in Ashford Prime OP at the time of the spin-off. Our ownership interest in Ashford Prime OP was 14.4% at September 30, 2014.
The following tables summarize the condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and the condensed combined consolidated statements of operations for the three and nine months ended September 30, 2013 of Ashford Prime OP (in thousands):
Ashford Hospitality Prime Limited Partnership
Condensed Balance Sheets
 
September 30, 2014
 
December 31, 2013
Total assets
$
1,252,996

 
$
962,419

Total liabilities
805,130

 
659,292

Partners’ capital
447,866

 
303,127

Total liabilities and partners’ capital
$
1,252,996

 
$
962,419

Our ownership interest in Ashford Prime OP
$
55,589

 
$
56,243


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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Ashford Hospitality Prime Limited Partnership
Condensed Statements of Operations
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenue
$
84,784

 
$
60,960

 
$
230,557

 
$
178,388

Total expenses
(70,086
)
 
(51,595
)
 
(196,270
)
 
(150,547
)
Operating income
14,698

 
9,365

 
34,287

 
27,841

Interest income
10

 
5

 
20

 
19

Interest expense and amortization and write-offs of loan costs
(10,137
)
 
(8,380
)
 
(29,159
)
 
(26,542
)
Unrealized gain (loss) on derivatives
3

 
(9
)
 
(63
)
 
(31
)
Income tax expense
(185
)
 
(952
)
 
(622
)
 
(2,255
)
Net income (loss)
4,389

 
29

 
4,463

 
(968
)
Loss from consolidated entities attributable to noncontrolling interests
154

 
371

 
741

 
575

Net income (loss) attributable to Ashford Prime OP
$
4,543

 
$
400

 
$
5,204

 
$
(393
)
Our equity in earnings of Ashford Prime OP
$
703

 
$
—

 
$
692

 
$
—

Additionally, as of September 30, 2014 and December 31, 2013, we had a 14.4% subordinated beneficial interest in a trust that holds the Four Seasons hotel property in Nevis, which had a zero carrying value.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

6. Indebtedness
Indebtedness consisted of the following (in thousands):
Indebtedness
 
Collateral
 
Maturity
 
Interest Rate
 
September 30, 2014
 
December 31, 2013
Mortgage loan (5)
 
5 hotels
 
March 2014
 
LIBOR (1) + 4.50%
 
$
—

 
$
164,433

Mortgage loan (7)
 
1 hotel
 
May 2014
 
8.32%
 
—

 
5,075

Senior credit facility (4)
 
Various
 
September 2014
 
LIBOR (1) + 2.75% to 3.50%
 
—

 
—

Mortgage loan (10)
 
5 hotels
 
November 2014
 
Greater of 6.40% or LIBOR (1) + 6.15%
 
211,000

 
211,000

Mortgage loan (8)
 
8 hotels
 
December 2014
 
5.75%
 
—

 
102,348

Mortgage loan (6) (8)
 
9 hotels
 
May 2015
 
LIBOR (1) + 6.50%
 
—

 
135,000

Mortgage loan
 
10 hotels
 
July 2015
 
5.22%
 
146,530

 
148,991

Mortgage loan (3)
 
1 hotel
 
September 2015
 
LIBOR (1) + 4.90%
 
—

 
69,000

Mortgage loan
 
8 hotels
 
December 2015
 
5.70%
 
93,319

 
94,899

Mortgage loan
 
5 hotels
 
February 2016
 
5.53%
 
106,032

 
107,737

Mortgage loan (8)
 
5 hotels
 
February 2016
 
5.53%
 
—

 
89,347

Mortgage loan
 
5 hotels
 
February 2016
 
5.53%
 
76,169

 
77,394

Mortgage loan (5)
 
5 hotels
 
February 2016
 
LIBOR (1) + 4.75%
 
200,000

 
—

Mortgage loan (2) (8)
 
7 hotels
 
August 2016
 
LIBOR (1) + 4.35%
 
301,000

 
—

Mortgage loan (2) (8)
 
5 hotels
 
August 2016
 
LIBOR (1) + 4.35%
 
62,900

 
—

Mortgage loan (2)
 
1 hotel
 
August 2016
 
LIBOR (1) + 4.20%
 
37,500

 
—

Mortgage loan
 
5 hotels
 
April 2017
 
5.95%
 
112,250

 
113,343

Mortgage loan
 
5 hotels
 
April 2017
 
5.95%
 
100,895

 
101,878

Mortgage loan
 
5 hotels
 
April 2017
 
5.95%
 
153,525

 
155,019

Mortgage loan
 
7 hotels
 
April 2017
 
5.95%
 
122,802

 
123,997

Mortgage loan (9)
 
1 hotel
 
July 2019
 
LIBOR (1) + 3.75%
 
5,525

 
—

Mortgage loan
 
1 hotel
 
November 2020
 
6.26%
 
100,246

 
101,268

Mortgage loan
 
1 hotel
 
January 2024
 
5.49%
 
10,709

 
10,800

Mortgage loan
 
1 hotel
 
January 2024
 
5.49%
 
7,337

 
7,400

Mortgage loan (7)
 
1 hotel
 
May 2024
 
4.99%
 
6,869

 
—

Mortgage loan (8)
 
3 hotels
 
August 2024
 
5.20%
 
67,520

 
—

Mortgage loan (8)
 
2 hotels
 
August 2024
 
4.85%
 
12,500

 
—

Mortgage loan (8)
 
3 hotels
 
August 2024
 
4.90%
 
24,980

 
—

Total
 
 
 
 
 
 
 
$
1,959,608

 
$
1,818,929

____________________________________
(1) LIBOR rates were 0.157% and 0.168% at September 30, 2014 and December 31, 2013, respectively.
(2) This mortgage loan has three one-year extension options subject to satisfaction of certain conditions.
(3) This mortgage loan was assumed by Ashford Prime in connection with the sale of the Pier House Resort.
(4) The senior credit facility expired in September 2014 and was not extended.
(5) On January 24, 2014, we refinanced our $164.4 million loan due March 2014 with a $200.0 million loan due February 2016, with three one-year extension options, subject to the satisfaction of certain conditions. The new loan provides for an interest rate of LIBOR + 4.75%, with a LIBOR floor of 0.20%.
(6) This mortgage loan had three one-year extension options subject to satisfaction of certain conditions. The first one-year extension period began in May 2014.
(7) On May 1, 2014, we refinanced our $5.1 million loan due May 2014 with a $6.9 million loan due May 2024, with no extension options. The new loan provides for a fixed interest rate of 4.99%.
(8) On July 25, 2014, we refinanced our $135.0 million loan due May 2015, $102.3 million loan due December 2014, and $89.3 million loan due February 2016 with a $301.0 million loan due August 2016, a $62.9 million loan due August 2016, a $67.5 million loan due August 2024, a $12.5 million loan due August 2024 and a $25.0 million loan due August 2024.
(9) This mortgage loan provides for an interest rate of LIBOR + 3.75% with a .25% LIBOR floor for the first 18 months and is fixed at 4.0% thereafter.
(10) This mortgage loan had three one-year extension options subject to satisfaction of certain conditions. The first one-year extension period began in November 2014.

Our senior credit facility expired in September 2014. We do not currently plan to replace it with another credit facility. Cash flows from operations, capital market activities and property refinancing proceeds have provided sufficient liquidity throughout the term of the credit facility. Additionally, we never drew on the credit facility. Accordingly, the absence of a credit facility is not expected to have a significant impact on our liquidity.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

On August 6, 2014, to fund a portion of the acquisition of the Fremont Marriott Silicon Valley hotel, we completed the financing of a $37.5 million mortgage loan. The mortgage loan bears interest at a rate of LIBOR + 4.20%. The stated maturity is August 6, 2016, with three one-year extension options. The mortgage loan is secured by the Fremont Marriott Silicon Valley hotel.
On July 31, 2014, to fund a portion of the acquisition of the Ashton hotel, we completed the financing of a $5.5 million mortgage loan. The mortgage loan bears interest at a rate of LIBOR + 3.75% (with a .25% LIBOR floor) for the first 18 months and a fixed rate of 4.0% thereafter. The stated maturity is July 31, 2019, with no extension options. The mortgage loan is secured by the Ashton hotel.
On July 25, 2014, we refinanced three mortgage loans, including our $135.0 million mortgage loan due May 2015, our $102.3 million mortgage loan due December 2014, which had an outstanding balance of $101.1 million, and our $89.3 million mortgage loan due February 2016, which had an outstanding balance of $88.5 million. The new loans total $468.9 million. As a result of the refinancing, the Homewood Suites Mobile and the Hampton Inn Terre Haute, Indiana are now unencumbered by debt. Other than the properties noted above, the new loans continue to be secured by the same hotel properties.
On May 1, 2014, we refinanced our $5.1 million loan due May 2014 with a $6.9 million loan due May 2024, with no extension options. The new loan provides for a fixed interest rate of 4.99%. The new loan continues to be secured by the same hotel property, the Courtyard Hartford-Manchester in Manchester, Connecticut.
On January 24, 2014, we refinanced our $164.4 million loan due March 2014 with a $200.0 million loan due February 2016, with three one-year extension options, subject to the satisfaction of certain conditions. The new loan provides for an interest rate of LIBOR + 4.75%, with a LIBOR floor of 0.20%. The new loan continues to be secured by the same five hotels that secured the original loan, including: the Embassy Suites Philadelphia Airport, Embassy Suites Walnut Creek, Sheraton Mission Valley San Diego, Sheraton Anchorage and the Hilton Minneapolis/St Paul Airport Mall of America.
We are required to maintain certain financial ratios under various debt and derivative agreements. If we violate covenants in any debt or derivative agreement, we could be required to repay a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of Ashford Trust or AHLP, our operating partnership, and the liabilities of such subsidiaries do not constitute the obligations of Ashford Trust or AHLP. Presently, our existing financial covenants are non-recourse and primarily relate to maintaining minimum debt coverage ratios, maintaining an overall minimum net worth, maintaining a maximum loan-to-value ratio, and maintaining an overall minimum total assets. As of September 30, 2014, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended.
We have derivative agreements that incorporate the loan covenant provisions of our senior credit facility (which expried in September 2014) requiring us to maintain certain minimum financial covenant ratios with respect to our indebtedness. Failure to comply with these covenant provisions would result in us being in default on any derivative instrument obligations covered by the applicable agreement. At September 30, 2014, we were in compliance with all the covenants incorporated from the senior credit facility and the fair value of derivatives that incorporate our senior credit facility covenant provisions was an asset of $101,000.
7. Income (Loss) Per Share
Basic income (loss) per common share is calculated using the two-class method by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is calculated using the two-class method, or treasury stock method if more dilutive, and reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower income per share.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss allocated to common shareholders:
 
 
 
 
 
 
 
Net loss attributable to the Company
$
(13,495
)
 
$
(16,335
)
 
$
(17,469
)
 
$
(23,915
)
Less: Dividends on preferred stocks
(8,490
)
 
(8,490
)
 
(25,471
)
 
(25,471
)
Less: Dividends on common stock
(10,661
)
 
(9,617
)
 
(30,930
)
 
(27,223
)
Less: Dividends on unvested restricted shares
(73
)
 
(51
)
 
(231
)
 
(163
)
Undistributed loss
(32,719
)
 
(34,493
)
 
(74,101
)
 
(76,772
)
Add back: Dividends on common stock
10,661

 
9,617

 
30,930

 
27,223

Distributed and undistributed net loss - basic and diluted
$
(22,058
)
 
$
(24,876
)
 
$
(43,171
)
 
$
(49,549
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
90,322

 
79,898

 
86,961

 
72,068

 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
Net loss allocated to common shareholders per share
$
(0.24
)
 
$
(0.31
)
 
$
(0.50
)
 
$
(0.69
)
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
Net loss allocated to common shareholders per share
$
(0.24
)
 
$
(0.31
)
 
$
(0.50
)
 
$
(0.69
)
Due to the anti-dilutive effect, the computation of diluted loss per share does not reflect adjustments for the following items (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss allocated to common shareholders is not adjusted for:
 
 
 
 
 
 
 
Income allocated to unvested restricted shares
$
73

 
$
51

 
$
231

 
$
163

Net loss attributable to noncontrolling interest in operating partnership units
(2,585
)
 
(2,892
)
 
(4,234
)
 
(5,152
)
Total
$
(2,512
)
 
$
(2,841
)
 
$
(4,003
)
 
$
(4,989
)
 
 
 
 
 
 
 
 
Weighted average diluted shares are not adjusted for:
 
 
 
 
 
 
 
Effect of unvested restricted shares
148

 
122

 
111

 
124

Effect of assumed conversion of operating partnership units
19,926

 
18,962

 
19,725

 
18,607

Total
20,074

 
19,084

 
19,836

 
18,731

8. Derivative Instruments and Hedging
Interest Rate Derivatives—We are exposed to risks arising from our business operations, economic conditions, and financial markets. To manage these risks, we use interest rate derivatives to hedge our debt and potentially improve cash flows. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR and RevPAR. Interest rate derivatives may include interest rate swaps, caps, floors and flooridors. Our derivatives are subject to master-netting settlement arrangements. The maturities on these instruments range from November 2014 to August 2016. To mitigate nonperformance risk, we routinely rely on a third party’s analysis of the creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.
During 2014 and 2013, we entered into interest rate caps with total notional amounts of $736.1 million and $268.9 million, respectively, to cap the interest rates on our mortgage loans, with maturities between March 2015 and August 2016, and strike rates between 1.80% and 2.59%, for total costs of $661,000 and $184,000, respectively. None of these interest rate caps were

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

designated as cash flow hedges. At September 30, 2014 and December 31, 2013, our floating interest rate mortgage loans, with principal balances of $812.4 million and $579.4 million, respectively, were capped by interest rate hedges. One interest rate cap entered into in 2013 with a notional amount of $199.9 million was transferred to Ashford Prime in connection with the spin-off in November 2013. Interest rate caps entered into in 2013 with a total amount of $69 million was transferred to Ashford Prime in connection with the sale of the Pier House Resort in March 2014.
Credit Default Swap Derivatives—In August 2011, we entered into credit default swap transactions for a notional amount of $100.0 million to hedge financial and capital market risk for an upfront cost of $8.2 million that was subsequently returned to us as collateral by our counterparty. A credit default swap is a derivative contract that functions like an insurance policy against the credit risk of an entity or obligation. The seller of protection assumes the credit risk of the reference obligation from the buyer (us) of protection in exchange for annual premium payments. If a default or a loss, as defined in the credit default swap agreements, occurs on the underlying bonds, then the buyer of protection is protected against those losses. The only liability for us, the buyer, is the annual premium and any change in value of the underlying CMBX index (if the trade is terminated prior to maturity). For all CMBX trades completed to date, we were the buyer of protection. Credit default swaps are subject to master-netting settlement arrangements and credit support annexes. Assuming the underlying bonds pay off at par over their remaining average life, our total exposure for these trades is approximately $8.5 million. Cash collateral is posted by us as well as our counterparty. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral. The change in market value of credit default swaps is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty when the change in market value is over $250,000. The net carrying value of our credit default swaps was an asset of $101,000 and liability of $73,000 as of September 30, 2014 and December 31, 2013, respectively, which are included in “Derivative assets, net” and “Liabilities associated with marketable securities and other”, respectively, in the consolidated balance sheets. We recognized an unrealized gain of $86,000 and an unrealized loss of $331,000 for the three and nine months ended September 30, 2014, respectively, and unrealized losses of $689,000 and $820,000 for the three and nine months ended September 30, 2013, respectively, which are included in “Unrealized loss on derivatives” in the consolidated statements of operations.
Marketable Securities and Liabilities Associated with Marketable Securities and other—We invest in public securities, including stocks and put and call options, which are considered derivatives. At September 30, 2014, we had investments in these derivatives totaling $769,000 and liabilities of $435,000. At December 31, 2013, we had investments in these derivatives totaling $560,000 and liabilities of $561,000.
9. Fair Value Measurements
Fair Value Hierarchy—For disclosure purposes, financial instruments, whether measured at fair value on a recurring or nonrecurring basis or not measured at fair value, are classified in a hierarchy consisting of three levels based on the observability of valuation inputs in the market place as discussed below:
•
Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.
Fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Fair values of interest rate caps, floors, flooridors, and corridors are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rates of the floors or rise above the strike rates of the caps. Variable interest rates used in the calculation of projected receipts and payments on the swaps, caps, and floors are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (Level 2 inputs). We also incorporate credit valuation adjustments (Level 3 inputs) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Fair values of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs). The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.
Fair values of marketable securities and liabilities associated with marketable securities, including public equity securities, equity put and call options, and other investments, are based on their quoted market closing prices (Level 1 inputs).
When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at September 30, 2014, the LIBOR interest rate forward curve (Level 2 inputs) assumed an uptrend from 0.16% to 1.05% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of hedge and non-hedge designated derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.

20
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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):
 
 
Quoted Market Prices (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Counterparty and Cash Collateral Netting(4)
 
Total
 
 
 
 
September 30, 2014:
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Interest rate derivatives - non-hedge
$
—

 
$
312

 
$
—

 
$
312

(1) 
 
Credit default swaps
—

 
664

 
(563
)
 
101

(1) 
 
Equity put and call options
769

 
—

 
—

 
769

(2) 
 
Non-derivative assets:
 
 
 
 
 
 
 
 
 
Equity and US treasury securities
43,504

 
—

 
—

 
43,504

(2) 
 
Total
44,273