S-11 1 d643219ds11.htm FORM S-11 Form S-11
Table of Contents

As filed with the Securities and Exchange Commission on December 18, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-11

FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933

OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES

 

 

Ashford Hospitality Prime, Inc.

(Exact name of registrant as specified in its governing instruments)

14185 Dallas Parkway

Suite 1100

Dallas, Texas 75254

(972) 490-9600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

David A. Brooks

14185 Dallas Parkway

Suite 1100

Dallas, Texas 75254

(972) 490-9600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jeffrey A. Chapman

Gibson, Dunn & Crutcher LLP

2100 McKinney Ave., Suite 1100

Dallas, TX 75201

(214) 698-3100

 

Howard B. Adler

Gibson, Dunn & Crutcher LLP

1050 Connecticut Ave., N.W.

Washington, D.C. 20036-5306

(202) 955-8500

 

Jeffrey M. Sullivan

Hunton & Williams LLP

421 Fayetteville Street, Suite 1400

Raleigh, NC 27601

(919) 899-3094

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (do not check if smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Securities Being Registered  

Proposed

Maximum Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Common Stock, $0.01 par value

  $75,000,000   $9,660

 

 

(1) Estimated solely for the purpose of determining the registration fee in accordance with Rule 457(o) of the Securities Act of 1933, as amended.
(2) Calculated in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement we have filed with the Securities and Exchange Commission to cover the securities has become effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale of these securities is not permitted.

 

SUBJECT TO COMPLETION, DATED DECEMBER 18, 2013

PRELIMINARY PROSPECTUS

            Shares

 

LOGO

Common Stock

 

 

Ashford Hospitality Prime, Inc. is a newly-formed, externally-advised company that invests primarily in high RevPAR, luxury, upper-upscale and upscale hotels. We own interests in eight hotels in five states and the District of Columbia with 3,146 total rooms. We are externally advised by a subsidiary of Ashford Hospitality Trust, Inc. (NYSE: AHT).

We are offering                shares of our common stock. Our shares of common stock are listed on the New York Stock Exchange under the symbol “AHP.” On                , 2013, the last reported sales price for our common stock on the New York Stock Exchange was $        per share.

We intend to elect to be taxed as, and to operate in a manner that will allow us to qualify as, a real estate investment trust (“REIT”) for federal income tax purposes commencing with our taxable year ending December 31, 2013. To assist us in complying with certain federal income tax requirements applicable to REITs, among other purposes, our charter contains certain restrictions relating to the ownership and transfer of our stock, including an ownership limit of 9.8% in value or number (whichever is more restrictive) of our outstanding common stock. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer” for a detailed description of the ownership and transfer restrictions applicable to our common stock.

We are an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012.

 

 

Investing in our common stock involves risks. You should carefully consider the matters described in the “Risk Factors ” section beginning on page 22.

 

 

 

     Per
Share
     Total  

Public offering price

   $                $            

Underwriting discount

   $         $     

Proceeds, before expenses, to us

   $         $     

 

 

We have granted the underwriters an option to purchase up to an additional                shares of our common stock at the public offering price, less the underwriting discount, within 30 days after the date of this prospectus.

Delivery of the shares of our common stock is expected to be made on or about                , 2013.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

BofA Merrill Lynch   Morgan Stanley

The date of this prospectus is                , 2013.


Table of Contents

TABLE OF CONTENTS

 

     Page  

SUMMARY

     1   

THE OFFERING

     17   

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

     19   

RISK FACTORS

     22   

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

     56   

USE OF PROCEEDS

     58   

MARKET PRICE INFORMATION

     59   

DISTRIBUTION POLICY

     60   

CAPITALIZATION

     61   

SELECTED HISTORICAL FINANCIAL INFORMATION

     63   

SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION

     65   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     69   

LODGING MARKET INDUSTRY OVERVIEW

     98   

OUR BUSINESS AND PROPERTIES

     101   

CERTAIN AGREEMENTS

     124   

MANAGEMENT

     152   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     166   

POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES

     174   

PRINCIPAL STOCKHOLDERS

     179   

DESCRIPTION OF OUR CAPITAL STOCK

     181   

MATERIAL PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS

     186   

SHARES ELIGIBLE FOR FUTURE SALE

     192   

PARTNERSHIP AGREEMENT

     195   

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

     200   

UNDERWRITING

     227   

LEGAL MATTERS

     233   

EXPERTS

     233   

WHERE YOU CAN FIND MORE INFORMATION

     233   

You should rely only on information contained in this prospectus or any free writing prospectus prepared by us. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus may only be used where it is legal to sell these securities, and this prospectus is not an offer to sell or a solicitation of an offer to buy shares in any state or jurisdiction where an offer or sale of shares would be unlawful. The information in this prospectus and any free writing prospectus prepared by us may be accurate only as of their respective dates. You should not assume that the information appearing in this prospectus is accurate as of any date other than the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of common stock. Our business, financial condition, results of operations, cash flows and/or prospects may have changed since that date.

 

 

This prospectus contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International® and Hilton Worldwide®. None of the owners of these trademarks, their affiliates or any of their respective officers, directors, agents or employees is an issuer of the shares described herein. In addition none of the owners of these trademarks, their affiliates or any of their respective officers, directors, agents or employees has or will have any liability arising out of or related to the sale or offer of the shares being offered hereby, including any liability or responsibility for any financial statements, projections or other financial information or other information contained in this prospectus or otherwise disseminated in connection with the offer or sale of the shares offered hereby.

 

 

 

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When used in this prospectus, the terms “our company,” “we,” “us,” “our” or “Ashford Prime” refer to Ashford Hospitality Prime, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Prime Limited Partnership, a Delaware limited partnership, which we refer to as “our operating partnership” or “Ashford Prime OP.” Additionally, other terms that we use throughout this prospectus are defined as follows:

 

    “ADR” means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate.

 

    “Ashford Advisor” means Ashford Hospitality Advisors LLC, a Delaware limited liability company and subsidiary of Ashford Trust.

 

    “Ashford TRS” means Ashford TRS Corporation, a Delaware corporation and a wholly-owned subsidiary of Ashford Trust OP.

 

    “Ashford Trust” means Ashford Hospitality Trust, Inc., a Maryland corporation, and, as the context may require, its consolidated subsidiaries, including Ashford Hospitality Limited Partnership, a Delaware limited partnership and Ashford Trust’s operating partnership, which we refer to as “Ashford Trust OP.”

 

    “EBITDA margin” means EBITDA as a percent of total revenue.

 

    “GAAP” means accounting principles generally accepted in the United States of America.

 

    “Gateway market” means, with respect to U.S. markets, any of the 20 most populous metropolitan statistical areas, as estimated by the United States Census Bureau and delineated by the U.S. Office of Management and Budget. With respect to foreign markets, a gateway market means an area that is a general destination or in close proximity to a major transportation hub or business center, such that it serves as a significant entry or departure point to a foreign country or region of a foreign country for business or leisure travelers.

 

    “High RevPAR,” for purposes of our investment strategy, means RevPAR of at least twice the then current U.S. average RevPAR for all hotels as determined by Smith Travel Research (i.e., anticipated RevPAR of at least $136 for the trailing 12 months ended September 30, 2013).

 

    “Hotel EBITDA margin” means EBITDA for a specific hotel as a percent of total revenue, with no allocation of corporate general and administrative expenses or non-recurring expenses.

 

    “Occupancy” means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period.

 

    “Our TRSs” refers to our taxable REIT subsidiaries, including Ashford Prime TRS Corporation, a Delaware corporation, which we refer to as “Ashford Prime TRS,” and its subsidiaries, together with the two taxable REIT subsidiaries that lease our two hotels held in a consolidated joint venture and are wholly owned by the joint venture.

 

    “Portfolio flow-through” means incremental total revenues flowing through to Hotel EBITDA.

 

    “Publicly-traded lodging REIT” means one of the 16 corporations or trusts (including Ashford Prime and Ashford Trust) that are qualified as REITs for federal income tax purposes, own substantially only hotel properties and no other types of real estate properties and have common stock traded on the New York Stock Exchange (“NYSE”), according to Securities and Exchange Commission (“SEC”) filings as of September 30, 2013.

 

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    “Remington” means Remington Lodging and Hospitality LLC, a property management company owned by Mr. Monty J. Bennett, our chief executive officer and chairman, and his father, Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust. Mr. Monty Bennett serves as the chief executive officer of Remington.

 

    “RevPAR” means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales, parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period).

 

    “RevPAR penetration index” measures a hotel’s RevPAR in relation to the average RevPAR of that hotel’s competitive set. We use the RevPAR penetration index as an indicator of a hotel’s market share in relation to its competitive set. However, the RevPAR penetration index for a particular hotel is not necessarily reflective of that hotel’s relative share of any particular lodging market and instead provides the relative revenue per room generated by each such property as compared to the competitive set. The RevPAR penetration index for a particular hotel is calculated as the quotient of (1) the subject hotel’s RevPAR divided by (2) the average RevPAR of the hotels in the subject hotel’s competitive set, including the subject hotel, multiplied by 100. Each hotel’s competitive set consists of a small group of hotels in the relevant market that we and the hotel management company that manages the hotel believe are comparable for purposes of benchmarking the performance of such hotel. RevPAR data, other than the RevPAR of our eight initial hotels, used in calculating any RevPAR penetration index in this prospectus was provided by Smith Travel Research.

 

    “TSR” or “total return” means, with respect to a company, the increase in the market price of the common stock of such company, assuming all dividends on the common stock are reinvested into additional shares of common stock.

For more information about occupancy, ADR and RevPAR, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Indicators of Operating Performance.” We also present five non-GAAP financial measures throughout this prospectus that we believe are useful to investors as key measures of our operating performance and liquidity: funds from operations (“FFO”); adjusted FFO (“AFFO”); earnings before interest expense, taxes, depreciation and amortization (“EBITDA”); adjusted EBITDA (“Adjusted EBITDA”); and hotel EBITDA (“Hotel EBITDA”). For an in-depth discussion of these financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

References to websites included in this prospectus are intended to be inactive textual references only, and the information on such websites is not incorporated by reference into this prospectus.

 

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MARKET DATA AND INDUSTRY FORECASTS

We use market data and industry forecasts and projections throughout this prospectus, including data from publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there can be no assurance that any of the forecasts or projections will be achieved. The quantitative information may be derived from estimates and subjective judgments and may be subject to limited audit and validation procedures. We believe that the surveys and market research others have performed are reliable, but we have not independently investigated or verified this information. In addition, the projections obtained from Smith Travel Research and PKF Hospitality Research, LLC that we have included in this prospectus have not been “expertized” within the meaning of the federal securities laws and are, therefore, solely our responsibility. As a result, neither Smith Travel Research nor PKF Hospitality Research, LLC has or will have any liability or responsibility to our stockholders or Ashford Prime OP unit holders for any market data and industry forecasts and projections that are contained in this prospectus.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. It is not complete and does not contain all of the information that you should consider before investing in shares of our common stock. You should read carefully the entire prospectus, including the information set forth under “Risk Factors” beginning on page 21, before deciding to invest in our common stock.

Unless indicated otherwise, the information included in this prospectus assumes (i) the sale of the shares of our common stock in this offering at a price of $         per share, the last reported sales price for our common stock on the New York Stock Exchange (“NYSE”) on                 , 2013, and (ii) no exercise by the underwriters of their option to purchase up to an additional                 shares of our common stock.

Our Company

We are a newly formed, externally-advised Maryland corporation that invests primarily in high RevPAR, luxury, upper-upscale and upscale hotels. As of December 18, 2013, we owned interests in eight hotels in five states and the District of Columbia with 3,146 total rooms. The hotels in our initial portfolio are located in U.S. gateway markets with favorable growth characteristics resulting from multiple demand generators and limited risk of additional supply. Our initial portfolio generated RevPAR of $153.50 for the nine months ended September 30, 2013, which is 218% of the average of the U.S. lodging industry, according to Smith Travel Research, Inc.

We became a public company on November 19, 2013, when Ashford Trust, an NYSE-listed REIT, completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. Ashford Advisor, a subsidiary of Ashford Trust, is our external advisor. All of the hotels in our portfolio are asset-managed by Ashford Advisor. As of December 18, 2013, Ashford Trust beneficially owned common units of our operating partnership, Ashford Prime OP, representing 20% of our company on a fully-diluted basis.

Our strategy is to invest primarily in full-service and select-service hotels in the luxury, upper-upscale and upscale segments which are anticipated to generate RevPAR of at least twice the then-current U.S. average RevPAR for all hotels as determined by Smith Travel Research (i.e. anticipated RevPAR of at least $136 for the trailing 12 months ended September 30, 2013) (which we refer to as “high RevPAR”). Our hotels are located predominantly in domestic gateway markets. We may also seek to acquire hotels in international gateway markets and resort markets that satisfy the same anticipated RevPAR criteria as our domestic hotels (after any applicable currency conversion). We intend to acquire both premium-branded and independent hotels. We distinguish ourselves from Ashford Trust, which invests opportunistically across all segments and at all levels of the capital structure within the hospitality industry, based on our more conservative capital structure, our focus on higher RevPAR hotels and our interest in international assets predominantly in gateway markets.

We believe that the current market environment presents attractive opportunities for us to acquire additional hotels that are compatible with our investment strategy. We also believe that current lodging market fundamentals present favorable opportunities for RevPAR and EBITDA growth at our eight initial hotels.

We do not have any employees. All of the services that might be provided by employees are provided to us by Ashford Advisor pursuant to an advisory agreement.

We intend to elect to be treated as a REIT for federal income tax purposes. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership.

 

 

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Our Acquisition Activity

In connection with the spin-off, we entered into two option agreements to acquire two hotels from Ashford Trust: the Pier House Resort in Key West, Florida and the Crystal Gateway Marriott in Arlington, Virginia. The Pier House Resort opened in 1968 and has 142 rooms. The Crystal Gateway Marriott opened in 1982 and has 697 rooms. We intend to use a portion of the net proceeds of this offering to acquire the Pier House Resort. See “Our Business and Properties—Our Option Hotels—Pier House Resort, Key West, FL.” We also intend to use the net proceeds of this offering to acquire additional properties in the ordinary course of business in a manner consistent with our investment guidelines and strategies and, to a lesser extent, for general corporate purposes and working capital.

In May 2013, Ashford Trust acquired the Pier House Resort in Key West, Florida, for total cash consideration of $90 million ($634,000 per key). The purchase price, at acquisition, represented a trailing 12-month capitalization rate of 6.2% on net operating income and an EBITDA multiple of 14.3x. The Pier House Resort was built in 1968 and contains 142 rooms including 119 guest rooms and 23 suites. The hotel has 40 waterfront facing rooms and suites, 2,600 square feet of meeting space, a 10,000 square foot spa with 10 treatment rooms, three food and beverage outlets and the renowned Chartroom bar, a full-service fitness facility and private dock for charter pick-ups. The hotel is located at the northern end of Duval Street in the heart of Key West on a 6-acre compound with a private beach and immediate access to the Gulf of Mexico.

Following Ashford Trust’s acquisition of the Pier House Resort, Ashford Trust implemented several initiatives intended to increase revenue and cut costs, including costs relating to salaries and wages, health insurance, property insurance and food and beverage. For the first four months ended September 30, 2013 post acquisition, total revenues and operating income for the Pier House Resort increased 8.2% and 42.4%, respectively, on a year over year basis.

We also entered into a right of first offer agreement with Ashford Trust, in connection with the spin-off, for 12 hotels currently held by Ashford Trust. We generally have the first right to acquire any of these hotels that Ashford Trust decides to sell, subject to any prior rights of the managers of the hotels or other third parties.

We frequently evaluate opportunities to acquire additional hotels, either through direct ownership, joint ventures, partnership participations or similar arrangements. We may use cash or issue common units in Ashford Prime OP as currency for a transaction. Some or all of these acquisitions, if completed, may be material to our company, individually or in the aggregate. We may, from time to time, be party to letters of intent, term sheets and other non-binding agreements relating to potential acquisitions. As of December 18, 2013, we were reviewing potential acquisition opportunities with estimated aggregate purchase prices in excess of $150 million (not including the Pier House Resort, the Crystal Gateway Marriott or the 12 hotels subject to the right of first offer agreement with Ashford Trust). We cannot assure you that we will enter into definitive acquisition agreements with respect to any potential acquisitions.

 

 

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Our Hotels

As of December 18, 2013, we owned interests in eight hotels in five states and the District of Columbia. All of the hotels in our portfolio operate under premium brands affiliated with either Marriott International, Inc. (“Marriott”) or Hilton Worldwide, Inc. (“Hilton”). The following tables set forth additional information for our hotels (dollars in thousands, except ADR and RevPAR).

 

                    Year Ended December 31, 2012  

Hotel Property

  Location   Total
Rooms
    %
Owned
    Occupancy     ADR     RevPAR     RevPAR
Penetration
Index
    Hotel
EBITDA(1)
 

Hilton La Jolla Torrey Pines(2)

  La Jolla, CA     394        75     76   $ 166.41      $ 126.19        103.2      $ 8,898   

The Capital Hilton

  Washington, D.C.     544        75     82     213.93        176.09        107.2        15,285   

Marriott Plano Legacy Town Center

  Plano, TX     404        100     66     162.59        107.91        128.6        8,392   

Seattle Marriott Waterfront

  Seattle, WA     358        100     78     200.34        155.64        109.9        10,521   

Courtyard San Francisco Downtown

  San Francisco, CA     405        100     85     206.95        176.66        103.7        10,135   

Courtyard Seattle Downtown

  Seattle, WA     250        100     72     148.58        107.02        109.0        4,860   

Courtyard Philadelphia Downtown

  Philadelphia, PA     498        100     78     161.20        125.56        114.4        9,805   

Renaissance Tampa International Plaza(3)

  Tampa, FL     293        100     78     154.68        120.57        127.6        5,144   
   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total / Weighted Average(4)

      3,146          77   $ 181.13      $ 140.20        110.8      $ 73,040   
                    Nine Months Ended September 30, 2013  

Hotel Property

  Location               Occupancy     ADR     RevPAR     RevPAR
Penetration
Index
    Hotel
EBITDA(1)
 

Hilton La Jolla Torrey Pines(2)

  La Jolla, CA         78   $ 173.18      $ 135.53        99.6      $ 6,900   

The Capital Hilton

  Washington, D.C.         87     216.16        188.42        106.6        12,144   

Marriott Plano Legacy Town Center

  Plano, TX         67     172.66        115.96        128.1        6,572   

Seattle Marriott Waterfront

  Seattle, WA         80     224.36        179.97        113.6        9,680   

Courtyard San Francisco Downtown

  San Francisco, CA         90     224.66        202.39        104.7        9,617   

Courtyard Seattle Downtown

  Seattle, WA         77     167.66        129.03        110.2        4,248   

Courtyard Philadelphia Downtown

  Philadelphia, PA         81     164.39        132.37        118.3        8,424   

Renaissance Tampa International Plaza(3)

  Tampa, FL         79     155.20        121.90        123.4        3,764   
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total /Weighted Average(4)

          80   $ 190.94      $ 153.50        111.0      $ 61,349   

 

(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a reconciliation of Hotel EBITDA by property. We own the Hilton La Jolla Torrey Pines and The Capital Hilton in a joint venture. The Hotel EBITDA represents the total amount for each hotel, not our pro rata amount based on our ownership percentage.
(2)  Subject to a ground lease that expires in 2043.
(3)  Subject to a ground lease that expires in 2080.
(4)  RevPAR penetration represents a weighted average based on the sum of the product of RevPAR for the competitive set of each hotel and the total room count for the respective hotel for all eight hotels in our portfolio. All other values on this line are calculated on a portfolio basis for all eight hotels in our portfolio.

Our Competitive Strengths

We believe we distinguish ourselves from other hotel owners through the following competitive strengths:

 

   

High Quality Hotel Portfolio. The RevPAR of our initial hotel portfolio was $153.50 for the nine months ended September 30, 2013, which is 218% of the average of the U.S. lodging industry, according to Smith Travel Research, Inc., and highlights the overall quality of our portfolio. Our portfolio strength is evidenced by its weighted average RevPAR penetration index of 111.0 for the nine months ended September 30, 2013. Furthermore, our portfolio exhibits strong cash flow characteristics, with Hotel EBITDA per room of approximately $19,500 for the nine months ended September 30, 2013, which places us in the top quartile of all publicly-traded lodging REITs for 2013. Our Hotel EBITDA per room is supported by our strong portfolio flow-through, which resulted in Hotel EBITDA margin expansion of 462 basis points since 2009. Finally, our portfolio is in excellent physical

 

 

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condition; Ashford Trust invested an average of nearly $23,000 per room in the portfolio from January 1, 2008 through December 31, 2012.

 

    Distinct Investment Strategy. Our strategy is to invest primarily in full-service and select-service hotels in the luxury, upper-upscale and upscale segments which are anticipated to generate RevPAR of at least twice the then current U.S. average RevPAR for all hotels as determined by Smith Travel Research (i.e. anticipated RevPAR of at least $136 for the trailing 12 months ended September 30, 2013). Our hotels are located predominantly in domestic gateway markets. We may also seek to acquire hotels outside of the U.S. that satisfy the same anticipated RevPAR criteria as our domestic hotels (after any applicable currency conversion), with a primary focus on international gateway cities. In addition, we may invest in upper-upscale and luxury hotels situated in resort markets when those hotels meet our stated RevPAR criteria. We intend to acquire both premium branded and independent hotels.

 

    Option Agreements for Pier House Resort and Crystal Gateway Marriott. In connection with the spin-off, we entered into two option agreements to acquire two hotels from Ashford Trust: the Pier House Resort in Key West, Florida and the Crystal Gateway Marriott in Arlington, Virginia. We intend to use a portion of the net proceeds from this offering to exercise our option to acquire the Pier House Resort. The following tables set forth additional information for the Pier House Resort and Crystal Gateway Marriott:

 

     Location      Total
Rooms
     %
Owned
    Year Ended December 31, 2012  

Hotel Property

           Occupancy     ADR      RevPAR      RevPAR
Penetration
Index
     Hotel
EBITDA
 

Pier House Resort

     Key West, FL         142         100     82.8   $ 332.71       $ 275.50         97.7       $ 5,531   

Crystal Gateway Marriott

     Arlington, VA         697         100     75.1     182.39         136.97         112.5         15,972   
                         Nine Months Ended September 30, 2013  

Hotel Property

   Location           Occupancy     ADR      RevPAR      RevPAR
Penetration
Index
     Hotel
EBITDA
 

Pier House Resort

     Key West, FL              82.5   $ 365.70       $ 301.80         96.8       $ 5,621   

Crystal Gateway Marriott

     Arlington, VA              76.1     175.64         133.65         111.7         11,596   

 

     For a detailed discussion of the option agreements, see “Our Business and Properties—Our Option Hotels” and “Certain Agreements—Option Agreements.”

 

 

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    Right of First Offer on Additional High-Quality Assets from Ashford Trust. In connection with the spin-off, we entered into a right of first offer agreement with Ashford Trust for the following 12 hotels currently held by Ashford Trust:

 

Hotel Property

   Location    Total
Rooms
     %
Owned
    RevPAR for
Year
Ended
December 31, 2012
     RevPAR for
Nine Months
Ended
September 30,

2013
 

Crowne Plaza Beverly Hills*

   Beverly Hills, CA      260         100   $ 133.00       $ 140.04   

Embassy Suites Crystal City

   Arlington, VA      267         100     156.81         157.94   

Crowne Plaza Key West

   Key West, FL      160         100     177.08         200.37   

Hyatt Coral Gables

   Coral Gables, FL      242         100     133.98         142.48   

One Ocean Jacksonville

   Jacksonville, FL      193         100     108.41         119.56   

Houston Embassy Suites

   Houston, TX      150         100     134.86         142.81   

Portland Embassy Suites

   Portland, OR      276         100     131.83         149.29   

Ritz-Carlton Atlanta

   Atlanta, GA      444         72 %**      123.60         133.28   

Hilton Boston Back Bay

   Boston, MA      390         72 %**      184.47         189.89   

Courtyard Boston Downtown

   Boston, MA      315         72 %**      133.64         131.06   

The Churchill

   Washington, D.C.      173         72 %**      122.99         121.52   

The Melrose

   Washington, D.C.      240         72 %**      122.00         125.43   

 

* Ashford Trust has entered into a franchise agreement to convert this hotel to a Marriott after the expiration of the existing Crowne Plaza license agreement in March 2015.
** These hotels are owned by a joint venture in which Ashford Trust holds an approximate 71.74% common equity interest and a $25.0 million preferred equity interest. To the extent Ashford Trust has the opportunity to acquire the entire interest in these hotels or controls the right to sell these hotels, the right of first offer agreement between us and Ashford Trust will extend to these properties.

For a detailed discussion of the right of first offer agreement, see “Certain Agreements—Right of First Offer Agreement.”

 

    Experienced Team with Proven Track Record of Delivering Stockholder Value. Ashford Advisor’s management team has generated an approximate 129% total return measured from September 1, 2003 through September 30, 2013. During the financial crisis, Ashford Trust entered into consensual foreclosures on three hotel properties, realizing a net loss on investments in these properties of $56.7 million; however, since January 2009, Ashford Trust has generated the highest total return to stockholders of all publicly-traded lodging REITs that existed throughout that period, with an approximate 933% total return measured from January 1, 2009 through September 30, 2013. The Ashford Trust management team has successfully completed several multi-property acquisitions for Ashford Trust, including the $2.4 billion acquisition of the 51-property CNL Hotels & Resorts portfolio in 2007 and the $1.3 billion acquisition of the 28-property Highland Hospitality portfolio in 2011. Each of the chief executive officer, president, chief financial officer, chief operating officer and chief accounting officer of Ashford Trust has more than 20 years of lodging or real estate experience.

 

   

Highly Aligned Management Structure. As of December 18, 2013, Ashford Trust, the parent of Ashford Advisor, beneficially owned 20% of the outstanding common units of our operating partnership. As of December 18, 2013, the executive management team and directors of Ashford Trust, together with Mr. Archie Bennett, Jr., chairman emeritus and co-founder of Ashford Trust, owned, directly or indirectly, approximately 19% of the equity interest in our company on a fully-diluted basis. By comparison, the average level of insider ownership for publicly-traded lodging REITs was 3% (excluding Ashford Prime and Ashford Trust) as of the most recently available public information. The

 

 

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fees payable pursuant to the advisory agreement are based upon our total enterprise value (which includes the aggregate principal amount of our consolidated indebtedness) rather than our gross book value, resulting in lower advisory fees if our stock price decreases. Furthermore, the incentive fees payable under the advisory agreement are based on our total stockholder return outperformance compared to a defined peer group.

 

    Attractive Corporate Governance. Our governance structure is designed to provide transparency to investors and promote the long-term interests of stockholders. Some of the significant features of our corporate governance structure include:

 

    External advisor owned by publicly-traded company.

 

    Non-classified seven member board with five independent directors, four of whom have no prior affiliation with Ashford Trust, and a lead independent director.

 

    Corporate governance policy that requires the board consist of at least two-thirds independent directors at all times that we do not have an independent chairman.

 

    Charter provision and corporate governance policy that address conflicts.

 

    Ashford Trust’s retained beneficial interest in our company is in the form of common units of our operating partnership, which generally do not convey voting power with respect to matters voted on by our stockholders.

 

    Opt out of certain Maryland law antitakeover provisions.

 

    No stockholder rights plan unless our stockholders approve or ratify the adoption of a plan.

Our Investment and Growth Strategies

Our principal business objectives are to generate attractive returns on our invested capital and long-term growth in cash flow to maximize total returns to our stockholders. To achieve our objectives, we intend to pursue the following strategies:

Pursue Focused Investment Strategy. Our strategy is to invest in premium branded and high quality independent hotels that are:

 

    full-service and select-service hotels in the luxury, upper-upscale and upscale segments which are anticipated to generate RevPAR at least twice the average RevPAR for the U.S. lodging industry, as determined by Smith Travel Research (i.e. RevPAR of at least $136 for the trailing 12 months ended September 30, 2013), located predominately in U.S. gateway markets;

 

    hotels located outside of the U.S. that satisfy the same anticipated RevPAR criteria as our domestic hotels (after any applicable currency conversion), with a primary focus on international gateway markets; and

 

    upper-upscale and luxury hotels in U.S. and international resort markets and meeting our stated RevPAR criteria.

We intend to concentrate our investments in markets where we believe there are significant growth opportunities and limited risk of additional supply. In determining anticipated RevPAR for a particular asset, we may take into account forecasts and other considerations, including without limitation, conversions or repositions of assets, capital plans, brand changes and other factors which may reasonably be forecasted to raise RevPAR after stabilization. Stabilization with respect to a hotel, after the completion of an initiative such as a capital plan, conversion or change of brand name or change of the business mix or other operating characteristics, is generally expected to occur within 12 to 24 months after the completion of the related renovation, reposition or brand change.

 

 

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Continue Active Asset Management. Ashford Advisor aggressively asset-manages the hotels in our initial portfolio, and will aggressively asset manage any hotel properties we may acquire in the future, to help maximize the operating performance, cash flow and value of each hotel. Asset management functions include acquisition, renovation, financing and disposition of assets, operational accountability of managers, budget review, capital expenditures and property-level strategies, as compared to the day-to-day management of our hotels, which are performed by our property managers.

Employ Disciplined Capital Allocation Program. We intend to pursue a disciplined capital allocation strategy as it relates to the acquisition, operation, disposition and financing of assets in our initial portfolio and those that we may acquire in the future. Ashford Advisor utilizes its extensive industry experience and capital markets expertise to influence the timing of capital deployment and recycling, and we may selectively sell hotels that are no longer consistent with our investment strategy or as to which returns appear to have been maximized. To the extent we sell hotels, we generally intend to redeploy the capital into investment opportunities that we believe will achieve higher returns.

Our History and Relationship with Ashford Trust and Ashford Advisor

Until the completion of the spin-off on November 19, 2013, we were a subsidiary of Ashford Trust, an NYSE-listed REIT. Ashford Trust created us to concentrate its ownership of certain of its higher RevPAR hotels in gateway markets. The following chart summarizes the key similarities and distinctions between us and Ashford Trust:

 

    

Ashford Prime

  

Ashford Trust

Investment Focus    Full-service and select-service hotels anticipated to generate RevPAR at least twice the national average.    All segments of the hospitality industry, with RevPAR criteria outside the Ashford Prime investment focus.
Investment Type    Direct hotel investments and joint ventures.    Direct hotel investments, joint ventures and debt.
Geography    Domestic and international gateway markets and select resort locations.    National focus, including primary, secondary and tertiary markets.
Chain Scale    Upscale, upper-upscale and luxury.    Various chain scale segments.
Mix of Service    Full-service and select-service in urban markets.    Full-service and select-service.
Capital Structure/Leverage Policy    Conservative. Target < 5.0x net debt and preferred equity to EBITDA.    Opportunistic. Strategic use of debt designed to maximize returns.
Brand Strategy    Premium brands and high quality independent hotels.    Premium brands and high quality independent hotels.
Management    Ashford Advisor    Ashford Advisor

Because of our unique relationship with Ashford Trust, we may be able to pursue attractive portfolio acquisition opportunities jointly, giving us a distinct advantage when only portions of the portfolio satisfy our investment focus.

 

 

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Relationship with Ashford Trust. Ashford Trust contributed our initial assets to us in the spin-off. As of December 18, 2013, Ashford Trust beneficially owned 20% of the outstanding common units of our operating partnership. The executive management team and directors of Ashford Trust, together with Mr. Archie Bennett, Jr., chairman emeritus and co-founder of Ashford Trust, owned, directly or indirectly, approximately 19% of the equity interest in our company on a fully-diluted basis. Beginning one year from the issuance date, the common units in our operating partnership will be redeemable by the holder for cash or, at our option, into shares of our common stock on a one-for-one basis. Accordingly, Ashford Trust OP’s initial ownership interest in our operating partnership represents a 20% ownership interest in our outstanding common stock, on a fully-diluted basis, assuming all common units are redeemed and we elect to issue shares of our common stock in lieu of paying the redemption price. We own approximately 64.7% of the common units in our operating partnership, meaning our stockholders own approximately 64.7% of our outstanding common stock on a fully diluted basis. See “Certain Relationships and Related Person Transaction—Spin-Off from Ashford Trust.”

Upon completion of the spin-off, we entered into two separate option agreements and a right of first offer agreement with Ashford Trust. See “Certain Agreements—Option Agreement” and “Certain Agreements—Right of First Offer Agreement.”

Relationship with Ashford Advisor. Upon completion of the spin-off, we entered into an advisory agreement with Ashford Advisor. Pursuant to this agreement, Ashford Advisor manages the day-to-day operations of our company and all affiliates in conformity with our investment guidelines, which may be modified or supplemented by our board of directors from time to time except that our investment guidelines cannot be revised in a manner that is directly competitive with Ashford Trust. Our advisory agreement has an initial five-year term and will be automatically renewed for one-year terms thereafter unless terminated either by us or Ashford Advisor. For more information about the advisory agreement, see “Certain Agreements—Relationship with the Advisor.”

Ashford Advisor is entitled to receive from us, among other fees, certain fees as payment for managing our day-to-day operations and an incentive fee based upon our total shareholder return versus our peer group. The amounts payable to Ashford Advisor under our advisory agreement are described in more detail under “Certain Agreements—The Advisory Agreement—Fees and Expenses.”

We believe our relationship with Ashford Trust and Ashford Advisor benefits us because we believe the quality and depth of management expertise and experience available to us from Ashford Advisor could not be duplicated without a significant increase in our overhead costs.

Industry Overview

The U.S. lodging industry is in the fourth year of what we anticipate will be a continuing recovery from the recent financial crisis and related economic recession. We believe this is an attractive point in the lodging investment cycle.

Room night demand in the U.S. lodging industry historically has been directly correlated with macroeconomic trends, including growth in gross domestic product (“GDP”), corporate profitability, capital investments, consumer confidence and employment. Following a period of economic contraction and widespread job loss in 2008 and 2009, the U.S. economy has been exhibiting signs of a recovery, and the International Monetary Fund forecasts U.S. GDP growth of 2.6% in 2014 and 3.4% in 2015. Given the strong correlation between room night demand and growth in GDP, we believe the current projections of a gradual but consistent growth in GDP provide an attractive backdrop for a sustained recovery phase of the lodging cycle.

According to PKF Hospitality Research, LLC, hotel demand is expected to increase at a 2.6% compound annual rate from 2013 to 2016, including growth of 3.0% and 3.3%, respectively, for 2014 and 2015. In contrast,

 

 

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hotel supply is forecasted to grow more slowly, at a 1.5% compound annual rate from 2013 to 2016, including growth of 1.2% and 1.4%, respectively, for 2014 and 2015. We believe the strong growth in room night demand combined with limited addition to supply should provide hotel owners with the opportunity to increase ADR, as industry occupancy exceeds the long-term average. We further believe that this forecast for favorable demand/supply imbalance should result in significant gains in both RevPAR and hotel-level EBITDA. PKF Hospitality Research, LLC predicts industry-wide RevPAR will grow 6.6% in 2014, 7.5% in 2015, and 4.8% in 2016. We believe the prevailing industry supply and demand dynamic presents compelling growth opportunities for our portfolio of well-capitalized and well-located upscale and upper-upscale hotels. PKF Hospitality Research, LLC further predicts strong RevPAR growth across our key targeted investment segments, as indicated in the chart below:

 

LOGO

Source: Colliers PKF Hospitality Research.

For more information, see “Lodging Market Industry Overview.”

Summary Risk Factors

You should carefully read and consider the risk factors set forth under “Risk Factors,” as well as all other information contained in this prospectus. If any of the risks described in this prospectus occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline. Some of the risks include:

 

    We are significantly influenced by the economies and other conditions in the markets in which we operate, particularly in the metropolitan areas where we have high concentrations of hotels.

 

    Our investments are concentrated in the hotel industry, and the failure of the hotel industry to exhibit sustained improvement may adversely affect us.

 

    We depend on Ashford Advisor’s key personnel and the loss of their continued service could threaten our ability to operate our business successfully.

 

    The amount of fees and incentives paid to Ashford Advisor may exceed the average of internalized expenses of our industry peers.

 

    The prior performance of Ashford Trust is not indicative of our future performance.

 

 

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    Our business strategy depends on acquiring additional hotels on attractive terms.

 

    We rely on third-party property managers to operate our hotels and for a substantial majority of our cash flow.

 

    Conflicts of interest with Remington, a property management company owned by Mr. Monty J. Bennett, our chief executive officer and chairman, and his father, Mr. Archie Bennett, Jr., chairman emeritus of Ashford Trust, could result in our management acting other than in our stockholders’ best interest.

 

    Under the terms of our mutual exclusivity agreement with Remington, Remington may be able to pursue lodging investment opportunities that compete with us.

 

    Securities eligible for future sale, including the 20% of our company that Ashford Trust owned on a fully diluted basis as of December 18, 2013, may adversely affect the market price of our common stock.

 

    Our management agreements could adversely affect the sale or financing of hotel properties.

 

    All of our hotels currently operate under either Marriott or Hilton brands; therefore, we are subject to risks associated with concentrating our portfolio in just two brand families.

 

    Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur, and we would be adversely affected if we were unable to make required payments on our debt, comply with covenants in our indebtedness or refinance our indebtedness at maturity on favorable terms or at all.

 

    We may not be able to make distributions at expected levels or at all.

 

    Our separation and distribution agreement, our advisory agreement, the mutual exclusivity agreement, the master management agreement and other agreements entered into in connection with the spin-off were not negotiated on an arms-length basis and their terms may not be as favorable to us as if they were negotiated with an unaffiliated third party.

 

    Ashford Advisor is a subsidiary of Ashford Trust and may manage other entities in the future and direct attractive investment opportunities away from us. If we amend our investment guidelines, Ashford Advisor is not restricted from advising clients with similar investment guidelines.

 

    Ashford Advisor and its key employees, who are both our executive officers and Ashford Trust’s executive officers, face competing demands on their time.

 

    If we cannot obtain additional capital, our growth will be limited.

 

    We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Ashford Trust.

 

    We may not acquire any of the properties in our current acquisition pipeline.

 

    We may not be able to acquire any of the properties that are subject to the right of first offer agreement, either because Ashford Trust does not elect to sell such properties or we are not in a position to acquire the properties when Ashford Trust elects to sell. Likewise, we may not be able to acquire the properties subject to the option agreements because, in certain limited circumstances, Ashford Trust has a right to terminate such agreements.

 

    If we exercise the option to purchase the Pier House Resort, the purchase price we pay for such hotel may be greater than the amount payable for a comparable property in a fully-marketed sale process.

 

    Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distribution to our stockholders.

 

    The market price of our shares may fluctuate widely.

 

    Your percentage ownership in our company may be diluted in the future.

 

 

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    The expansion of our business into new markets outside of the United States will expose us to risks relating to owning hotels in those international markets.

 

    Some of our hotels are held in joint ventures, and such joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.

Our Financing Strategy

As part of our separation from Ashford Trust, we assumed mortgage indebtedness secured by our eight initial hotels, which totaled $624.0 million (including the indebtedness secured by the two hotels we own through a consolidated joint venture) as of September 30, 2013. If we exercise our option to acquire the Pier House Resort, assuming it is encumbered by its existing debt at the time of the acquisition, we expect our property-level indebtedness to be approximately $693.0 million, with a weighted average interest rate of 5.29% per annum (based on outstanding principal balances at September 30, 2013). If we exercise our options to acquire both the Pier House Resort and Crystal Gateway Marriott, assuming both are encumbered by their existing debt at the time of the acquisition, we expect our property-level indebtedness to be approximately $810.7 million, with a weighted average interest rate of 5.42% per annum (based on outstanding principal balances at September 30, 2013). As of September 30, 2013, approximately 68.2% of our mortgage debt bears interest at fixed rates averaging 6.08% and the remaining 31.8% bears interest at the variable rate of LIBOR plus 3.5%. In connection with the spin-off, we assumed an interest rate cap with respect to our variable rate debt such that our interest rate is effectively capped at 6.5%. We intend to continue to use a mix of fixed and variable rate debt, and we may, if appropriate, enter into interest rate hedges related to our variable and fixed rate debt.

Concurrently with the completion of the spin-off, we entered into a three-year, $150 million secured revolving credit facility. The credit facility provides for a three-year term with two, one-year extension options, subject to certain terms and conditions, and bears interest at a range of 2.25%—3.75% over LIBOR, depending on our leverage ratio (as defined in the agreement). The credit facility includes the opportunity to expand the borrowing capacity by up to $150 million to an aggregate size of $300 million, subject to certain terms and conditions. No amounts were drawn under the credit facility as of December 18, 2013.

Our objective, over time, is to effectively deleverage our portfolio by acquiring additional hotels and applying less leverage than we had upon completion of the spin-off. Alternatively, we may deleverage via retaining excess cash to reduce our net debt. As of September 30, 2013, we had a leverage ratio of approximately 6.5x, based on property-level indebtedness related to our properties, which had an outstanding consolidated principal balance at September 30, 2013 of approximately $624.0 million and a weighted average interest rate of 5.32% per annum. We expect to achieve and maintain a net debt and preferred equity-to-EBITDA ratio of 5.0x or less. We define net debt and preferred equity as the outstanding principal amount of our consolidated indebtedness plus the liquidation preference of any outstanding preferred equity, less cash, cash equivalents and marketable securities.

We intend to finance our long-term growth and liquidity needs with operating cash flow, equity issuances, both common and preferred stock, joint ventures and secured and unsecured debt financings having staggered maturities. We may also issue common units in our operating partnership to acquire properties from sellers who seek a tax-deferred transaction.

Structure and Formation of Our Company

Prior to and concurrently with our separation from Ashford Trust and Ashford Trust’s distribution of our common stock to its stockholders, which we refer to as the “separation and distribution,” we engaged in certain formation transactions, which were designed to consolidate the ownership of a portfolio of interests in eight properties owned by Ashford Trust into our operating partnership, provide for our external management,

 

 

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facilitate the separation and distribution, provide us with our initial capital and enable us to qualify as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2013.

Pursuant to the terms of the separation and distribution agreement, on November 19, 2013, our operating partnership received a contribution of direct and indirect interests in a portfolio of eight hotel properties owned by Ashford Trust OP and certain of its subsidiaries plus approximately $145.3 million in exchange for approximately 8.8 million common units of our operating partnership and approximately 16.1 million shares of our common stock. We also assumed the property-level mortgage debt associated with our initial portfolio. The common units of our operating partnership issued to Ashford Trust OP were distributed to Ashford Trust OP’s limited partners, including Ashford Trust. Our common stock was distributed to Ashford Trust’s stockholders as a taxable pro rata special distribution. Ashford Prime TRS, a wholly-owned subsidiary of our operating partnership, purchased, for a cash payment of approximately $6.0 million, direct or indirect interests in the three taxable REIT subsidiaries that currently lease six of our eight properties. The two taxable REIT subsidiaries that currently lease the two properties in our portfolio held in a joint venture remain subsidiaries of the joint venture, but Ashford Trust’s equity interest in the joint venture was contributed to our operating partnership.

In addition, concurrently with the completion of the spin-off, we entered into an advisory agreement with Ashford Advisor; our operating partnership entered into a revolving credit facility; we entered into two option agreements and a right of first offer agreement with Ashford Trust OP; we entered into various registration rights agreements; and we entered into a mutual exclusivity agreement with Remington that was consented and agreed to by Mr. Monty J. Bennett, our chief executive officer and chairman, and a master management agreement with Remington. See “Certain Relationships and Related Person Transactions.” We will also reimburse Ashford Trust for the initial transaction cost of the separation and distribution of approximately $17.9 million.

Our Structure

The following diagram depicts our ownership structure.

 

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* The total number of shares of Ashford Trust’s common stock and our common stock outstanding used in calculating the ownership percentages assumes that all operating partnership units held by each of the officers and directors of Ashford Trust and our company, respectively, including long-term incentive plan units (“LTIP units”), have been redeemed for our common stock.
** Including Mr. Archie Bennett, Jr., chairman emeritus and co-founder of Ashford Trust.

As shown in the chart above, we own two of our properties in a joint venture structure. We have a 75% ownership interest in this joint venture and serve as the general partner; however, all major decisions related to these properties, including decisions related to selling or refinancing the hotels, are subject to the written approval of our joint venture partner. We also have the benefit of a preferred distribution in an amount equal to an 11% annual return on our unreturned ordinary capital.

Conflicts of Interest

Advisory Agreement. We are dependent on Ashford Advisor for our day-to-day management, and we do not have any independent officers or employees. Each of our executive officers and two of our directors also serve as key employees and as officers of Ashford Advisor and Ashford Trust. So long as Ashford Advisor is our external advisor, our governing documents require us to include two persons designated by Ashford Advisor as candidates for election as director at any stockholder meeting at which directors are to be elected. Such nominees may be executive officers of Ashford Trust. In connection with the spin-off, Messrs. Monty J. Bennett and Douglas A. Kessler were designated as candidates for election as directors by Ashford Advisor. Mr. Monty J. Bennett, our chief executive officer and chairman of our board of directors, is also the chief executive officer and chairman of the board of directors of Ashford Trust. We did not conduct arm’s-length negotiations with respect to the terms and structuring of our agreements, resulting in the principals of Ashford Trust having the ability to influence the type and level of benefits that they and our other affiliates received. We have not obtained third-party appraisals of the properties that were contributed to us in the separation and distribution or fairness opinions in connection with the separation and distribution. Accordingly, our advisory agreement and other agreements with Ashford Trust, including fees and other amounts payable, may not be as favorable to us as if they had been negotiated on an arm’s-length basis with unaffiliated third parties. In addition, the ability of Ashford Advisor and its officers and personnel to engage in other business activities, including the management of Ashford Trust and other entities, may reduce the time Ashford Advisor and its officers and personnel spend managing us.

Ashford Advisor personnel continue to advise Ashford Trust and may also advise other businesses in the future and will not be required to present us with investment opportunities that Ashford Advisor determines are outside of our investment guidelines and within the investment guidelines of another business advised by Ashford Advisor. Ashford Advisor must present us with investment opportunities it deems suitable for recommendation that satisfy our investment guidelines but will have discretion to determine which investment opportunities satisfy our investment guidelines. Any new individual investment opportunities that satisfy our initial investment guidelines will be presented to our board of directors, who will have up to 10 business days to accept any such opportunity prior to it being available to Ashford Trust or any other business advised by Ashford Advisor. However, if we materially change our investment guidelines without the express consent of Ashford Advisor, then Ashford Advisor will not have an obligation to present investment opportunities and instead Ashford Advisor will use its best judgment to allocate investment opportunities to us and other entities it advises, taking into account such factors as Ashford Advisor deems relevant, in its discretion, subject to any then existing obligations of Ashford Advisor to such other entities.

Portfolio investment opportunities (the acquisition of two or more properties in the same transaction) are treated differently. Some portfolio investment opportunities may include hotels that satisfy our investment guidelines as well as hotels that satisfy the investment guidelines of Ashford Trust or other businesses advised by Ashford Advisor. If the portfolio cannot be equitably divided by asset type and acquired on the basis of such

 

 

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asset types in satisfaction of each such entity’s investment guidelines, Ashford Advisor will be required to allocate portfolio investment opportunities between us, Ashford Trust and any other businesses advised by Ashford Advisor in a fair and equitable manner, consistent with such other entities’ investment guidelines. In making this determination, Ashford Advisor, using substantial discretion, will consider the investment strategy and guidelines of each entity with respect to acquisition of properties, portfolio concentrations, tax consequences, regulatory restrictions, liquidity requirements, financing and other factors deemed appropriate by Ashford Advisor. In making the allocation determination, Ashford Advisor has no obligation to make any investment opportunity available to us.

Remington Mutual Exclusivity Agreement. Our mutual exclusivity agreement with Remington provides that Remington will provide property management, project management and development services for all future properties that we acquire (including the Pier House Resort) to the extent we have the right or control the right to direct such matters, unless our independent directors either (i) unanimously vote not to hire Remington or (ii) based on special circumstances or past performance, by a majority vote, elect not to engage Remington because they have determined, in their reasonable business judgment, that it would be in our best interest not to engage Remington or that another manager or developer could perform the duties materially better. The initial term of the mutual exclusivity agreement is 10 years, with three seven year renewal options, followed by one four-year renewal option. Mr. Monty J. Bennett, our chief executive officer and chairman of our board of directors, and his father Mr. Archie Bennett, Jr. own 100% of Remington. Accordingly, they will benefit from the payment of property management, project management, development and other fees by us to Remington. The terms of the mutual exclusivity agreement between us and Remington limit our ability to engage other entities for property management, development, and other project management related services without the unanimous consent of our independent directors or, in certain circumstances, the majority vote of our independent directors. Remington may, subject to Ashford Trust’s right of first refusal, pursue lodging investment opportunities that it refers to us and that we elect not to pursue. This may result in our chief executive officer and chairman, Mr. Monty J. Bennett, and Remington competing with us, while Remington is managing other hotels for us.

Our Directors and Officers. Mr. Monty J. Bennett’s duties to us as a director and officer may conflict with his duties to, and pecuniary interest in, Remington and Ashford Trust. Therefore, the negotiations and agreements between us, our wholly-owned subsidiaries or our operating partnership and these entities and their affiliates may not solely reflect the interests of our stockholders.

To mitigate any potential conflicts of interest, five of the seven initial members of our board of directors are independent directors (and are also not directors of Ashford Trust). Furthermore, our charter requires that, at all times, a majority of our board of directors be independent directors and our corporate governance guidelines require that two-thirds of our board be independent directors at all times that we do not have an independent chairman. Our corporate governance policy provides that all decisions related to the right of first offer agreement with Ashford Trust; decisions related to the mutual exclusivity agreement or the master management agreement with Remington; decisions related to the advisory agreement with Ashford Advisor; decisions related to the option agreements with Ashford Trust; and all decisions related to the enforcement of the separation and distribution agreement be approved by a majority of the independent directors. Our directors also are subject to provisions of Maryland law that address transactions between Maryland corporations and our directors or other entities in which our directors have a material financial interest. In addition, our charter, consistent with Maryland law, contains a requirement that any transaction or agreement involving us, our wholly-owned subsidiaries or our operating partnership and a director or officer or an affiliate of any director or officer will require the approval of a majority of disinterested directors. However, there can be no assurance that these policies always will be successful in eliminating the influence of such conflicts, and if they are not successful, decisions could be made that might not fully reflect the interests of all of our stockholders.

 

 

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Corporate Information

We were incorporated in Maryland on April 5, 2013. Our principal executive offices are located at 14185 Dallas Parkway, Suite 1100, Dallas, Texas 75254. Our telephone number is (972) 490-9600. Our website is www.ahpreit.com. The information found on or accessible through our website is not incorporated into, and does not form a part of, this prospectus or any other report or document that we file with or furnish to the SEC. We have included our website address in this prospectus as an inactive textual reference and do not intend it to be an active link to our website.

Our Tax Status

We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ending December 31, 2013. Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”), relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares. Additionally, under applicable Treasury Regulations, if Ashford Trust failed to qualify as a REIT in any of its 2009 through 2013 taxable years, unless Ashford Trust’s failure to qualify as a REIT was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Ashford Trust failed to qualify. We believe that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Code and that our current and proposed manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.

So long as we qualify as a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we would be subject to U.S. federal income tax at regular corporate rates and would be precluded from re-electing to be taxed as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property, and the income of our TRSs will be subject to taxation at regular corporate rates.

Restrictions on Ownership and Transfer of our Stock

Due to limitations on the concentration of ownership of REIT stock imposed by the Code, among other purposes, our charter provides for restrictions on ownership and transfer of our shares of stock, including, in general, prohibitions on any person actually or constructively owning more than 9.8% in value or number (whichever is more restrictive) of the outstanding shares of our common stock or 9.8% in value or number (whichever is more restrictive) of the outstanding shares of any class or series of our preferred stock or any other stock of our company. Our charter, however, permits exceptions to be made for stockholders provided that our board of directors determines such exceptions will not jeopardize our tax status as a REIT.

Distribution Policy

On December 16, 2013, we announced a cash dividend of $0.05 per share of common stock. The common stock dividend will be paid on January 15, 2014 to stockholders of record as of the close of business on December 31, 2013.

We intend to make regular quarterly distributions to our stockholders. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  (i) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

 

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  (ii) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  (iii) any excess non-cash income (as determined under the Code).

See “Material Federal Income Tax Considerations.”

Distributions made by us will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law and other factors described under “Distribution Policy.” We expect that, at least initially, our distributions may exceed our net income under GAAP because of non-cash expenses included in net income. To the extent that our cash available for distribution is less than 90% of our REIT taxable income, we may consider various means to cover any such shortfall, including borrowing under our secured revolving credit facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from this or future offerings of equity, equity-related or debt securities or declaring taxable stock dividends. We cannot assure you that our distribution policy will not change in the future.

 

 

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THE OFFERING

 

Common stock offered by us

                shares (1)

 

Common stock to be outstanding after completion of this offering

                shares (1)(2)

 

Use of proceeds

We estimate that the net proceeds we will receive from the sale of shares of our common stock in this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full, after deducting the underwriting discount and estimated offering expenses payable by us.

 

  We intend to use the net proceeds of this offering to acquire the Pier House Resort and to acquire additional properties in the ordinary course of business and, to a lesser extent, for general corporate purposes and working capital. See “Use of Proceeds.”

 

NYSE Symbol

“AHP”

 

Distribution policy

We intend to make quarterly distributions to our common stockholders consistent with maintaining our REIT qualification for U.S. federal income tax purposes. Any distributions made by us will be determined by our board of directors, in its sole discretion, out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, EBITDA, FFO and results of operations, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements and such other factors as our board of directs deems relevant.

 

Ownership and transfer restrictions

We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2013. To assist us in qualifying as a REIT, stockholders are generally restricted from owning more than 9.8% in value or number of shares (whichever is more restrictive) of our outstanding shares of common or capital stock without the prior consent of our board of directors. See “Description of Our Capital Stock—Restrictions on Ownership and Transfer.”

 

Risk factors

Investing in our common stock involves significant risks. See “Risk Factors” beginning on page      and other information in this prospectus for a discussion of factors you should consider carefully before investing in our common stock.

 

 

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(1) Assumes no exercise by the underwriters of their option to purchase up to an additional                 shares of our common stock.
(2) Does not include 8,776,153 shares of common stock reserved for issuance upon redemption of common units of Ashford Prime OP issued to Ashford Trust OP in connection with the spin-off; 1,600,000 shares of common stock reserved for issuance to Ashford Advisor under our Advisor Equity Incentive Plan; 850,000 shares of common stock reserved for issuance to our directors, executive officers and other Ashford Advisor employees under our 2013 Equity Incentive Plan; any shares for which the common units of Ashford Prime OP we may issue to purchase the Pier House Resort or the Crystal Gateway Marriott may be redeemed; any shares we may issue to Ashford Advisor in payment of any portion of the incentive fee; and any shares for which common units of Ashford Prime OP we may issue to Ashford Advisor in payment of any portion of the incentive fee may be redeemed.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

You should read the following summary historical and pro forma financial information in conjunction with “Selected Historical Financial Information,” “Selected Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical and pro forma combined consolidated financial statements and related notes included elsewhere in this prospectus.

The summary combined consolidated historical financial information is a combination of the historical financial information for the eight properties that were contributed to us as part of the separation and distribution. These properties and certain related assets and liabilities are reflected in the combined consolidated financial statements as if they were owned in an entity separate from Ashford Trust during such periods; however they were not owned in a separate legal entity during such periods.

We have not presented the historical financial information of Ashford Hospitality Prime, Inc. because prior to the completion of the spin-off on November 19, 2013, it had no activity other than the issuance to Ashford TRS of 100 shares of common stock in connection with the initial capitalization of our company and activity in connection with the separation and distribution. Therefore, we do not believe a discussion of the historical results would be meaningful.

The summary historical combined consolidated financial information as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 has been derived from the audited financial statements appearing elsewhere in this prospectus. The summary historical combined consolidated financial information as of December 31, 2010 was derived from unaudited financial statements not included in this prospectus. The summary historical combined consolidated financial information as of September 30, 2013 and 2012 and the summary pro forma combined consolidated financial information for the year ended December 31, 2012 and the nine months ended September 30, 2013 has been derived from the unaudited financial statements and unaudited pro forma financial statements, respectively, appearing elsewhere in this prospectus. The summary historical and pro forma financial information in this section is not intended to replace these audited and unaudited financial statements. In addition, the pro forma balance sheet and income statement data below have been adjusted to reflect the completion of the separation and distribution, the exercise of the options to acquire the Pier House Resort and the Crystal Gateway Marriott and the completion of this offering.

The summary historical and pro forma financial information below and the financial statements included in this prospectus do not necessarily reflect what our results of operations, financial position and cash flows would have been if we had operated our initial eight properties, the Pier House Resort and the Crystal Gateway Marriott as a stand-alone publicly traded company during all periods presented, and, accordingly, this historical and pro forma information should not be relied upon as an indicator of our future performance.

 

 

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    Nine Months Ended September 30,     Year Ended December 31,  
    10 Properties
Pro Forma
Combined
Consolidated(1)
    9 Properties
Pro Forma
Combined
Consolidated(2)
    Historical Combined
Consolidated
    10 Properties
Pro Forma
Combined
Consolidated(1)
    9 Properties
Pro Forma
Combined
Consolidated(2)
    Historical Combined
Consolidated
 
    2013     2013     2013     2012     2012     2012     2012     2011     2010  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)                    
    (In thousands, except share, per share and property data)  

Statement of Operations Data

                 

Revenue

                 

Rooms

  $ 170,291      $ 144,580      $ 132,852      $ 117,054      $ 209,879      $ 175,129      $ 160,811      $ 130,477      $ 114,940   

Food and beverage

    51,136        40,141        37,799        36,149        68,709        53,781        50,784        46,628        42,410   

Rental income from operating leases

    —          —          —          —          —          —          —          5,341        5,435   

Other

    10,727        8,813        7,737        6,827        12,933        10,969        9,593        9,545        10,045   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel revenue

    232,154        193,534        178,388        160,030        291,521        239,879        221,188        191,991        172,830   

Expenses:

                 

Hotel operating expenses:

                 

Rooms

    38,058        31,796        30,183        26,666        46,995        39,103        37,001        31,429        28,625   

Food and beverage

    34,661        27,153        25,323        23,847        45,601        35,870        33,377        30,341        28,382   

Other expense

    59,088        48,998        46,599        42,396        73,833        59,877        59,013        49,949        46,205   

Management fees

    9,263        8,105        7,651        6,700        11,470        9,921        9,360        7,246        6,514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel expenses

    141,070        116,052        109,756        99,609        177,899        144,771        138,751        118,965        109,726   

Property taxes, insurance and other

    13,934        11,850        8,705        7,636        19,891        17,295        10,236        9,218        10,243   

Depreciation and amortization

    31,191        24,350        22,864        22,197        40,651        31,530        29,549        29,816        31,255   

Transaction costs

    872        872        —          —          —          —          —          —          —     

Corporate general and administrative(3)

    15,383        13,210        9,222        7,994        26,424        23,721        10,846        9,613        7,986   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    202,450        166,334        150,547        137,436        264,865        217,317        189,382        167,612        159,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    29,704        27,200        27,841        22,594        26,656        22,562        31,806        24,379        13,620   

Interest income

    23        19        19        19        87        76        29        24        88   

Other income

    —          —          —          —          —          —          —          9,673        —     

Interest expense and amortization of loan costs

    (32,133     (27,240     (24,571     (23,422     (41,442     (34,812     (31,244     (31,803     (31,988

Write-off of loan costs and exit fees

    (1,971     (1,971     (1,971     —          —          —          —          —          —     

Unrealized loss on derivatives

    (140     (140     (31     —          —          —          —          —          (28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (4,517     (2,132     1,287        (809     (14,699     (12,174     591        2,273        (18,308

Income tax expense

    (2,951     (2,376     (2,255     (3,287     (5,268     (4,549     (4,384     (2,636     (628
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (7,468     (4,508     (968     (4,096     (19,967     (16,723     (3,793     (363     (18,936

(Income) loss from consolidated entities attributable to noncontrolling interest

    575        575        575        471        (752     (752     (752     989        2,065   

Loss attributable to redeemable noncontrolling interests in operating partnership

    2,434        1,389                      7,314        6,169                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

  $ (4,459   $ (2,544   $ (393   $ (3,625   $ (13,405   $ (11,306   $ (4,545   $ 626      $ (16,871
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at period end):

                    (Unaudited

Cash

      $ 14,088      $ 18,032          $ 20,313      $ 16,451      $ 14,411   

Investment in hotel properties, net

        765,994        774,210            771,936        789,170        808,322   

Total assets

        832,746        849,257            847,280        863,418        862,908   

Total indebtedness

        624,029        573,053            570,809        577,996        582,713   

Total liabilities

        648,599        597,768            594,902        600,376        601,369   

Total equity

        184,147        251,489            252,378        263,042        261,539   

Total liabilities and equity

        832,746        849,257            847,280        863,418        862,908   

 

 

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    Nine Months Ended September 30,     Year Ended December 31,  
    10 Properties
Pro Forma
Combined
Consolidated(1)
    9 Properties
Pro Forma
Combined
Consolidated(2)
    Historical Combined
Consolidated
    10 Properties
Pro Forma
Combined
Consolidated(1)
    9 Properties
Pro Forma
Combined
Consolidated(2)
    Historical Combined
Consolidated
 
    2013     2013     2013     2012     2012     2012     2012     2011     2010  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)                    
    (In thousands, except share, per share and property data)  

Per Share Data (unaudited):

                 

Pro forma basic earnings per share

  $ (0.28   $ (0.16       $ (0.84   $ (0.70      

Pro forma diluted earnings per share

  $ (0.28   $ (0.16       $ (0.84   $ (0.70      

Pro forma weighted average shares outstanding—basic

    16,045        16,045            16,045        16,045         

Pro forma weighted average shares outstanding—diluted

    16,045        16,045            16,045        16,045         

Other Data:

                 

Number of properties at period end (unaudited)

    10        9        8        8        10        9        8        8        8   

Adjusted EBITDA (unaudited)

  $ 60,965      $ 51,610      $ 48,328      $ 41,974      $ 68,730      $ 55,750      $ 56,195      $ 50,186      $ 41,517   

Hotel EBITDA(4) (unaudited)

    78,566        66,970        61,349        53,281        94,542        78,570        73,040        66,292        53,065   

AFFO (unaudited)

    28,234        23,308        22,992        16,387        24,322        17,300        22,080        17,612        10,884   

Cash flows (used in) provided by:

                 

Operating activities

      $ 30,510      $ 21,725          $ 27,852      $ 15,395      $ 21,624   

Investing activities

        (17,380     (7,532         (11,944     (10,281     (22,695

Financing activities

        (19,355     (12,612         (12,046     (3,074     (4,605

 

(1)  Pro forma information reflects the completion of the separation and distribution, the exercise of the options to acquire the Pier House Resort and the Crystal Gateway Marriott and the completion of this offering, including the issuance and sale of                 shares in this offering.
(2)  Pro forma information reflects the completion of the separation and distribution, the exercise of the option to acquire the Pier House Resort and the completion of this offering, including the issuance and sale of                 shares in this offering.
(3)  Our corporate general and administrative expense following the spin-off will consist of direct general and administrative costs that we incur as well as reimbursable costs that Ashford Advisor incurs on our behalf. Without taking into account any additional growth of our company, including through acquisitions, we expect our annual corporate general and administrative costs for 2014 to range from approximately $4-5 million. We will also pay a base management fee of 0.70% times our total enterprise value to Ashford Advisor. Our total enterprise value as of December 15, 2013 was $1,115 million based on the definition of total enterprise value in the Advisory Agreement. As such, the annualized base management fee would be approximately $7.8 million based on that total enterprise value. We will also pay Ashford Advisor an incentive fee if our TSR exceeds the average TSR of our peer group as defined in the advisory agreement. The corporate general and administrative expense shown in this pro forma financial information includes allocated costs and expenses from Ashford Trust that we will not incur following the completion of the spin-off, as well as estimates of the base and incentive fees payable to Ashford Advisor, assuming that (i) the advisory agreement had been in effect, (ii) our company had the same TSR as Ashford Trust and (iii) our company had a total enterprise value based on a percentage of Ashford Trust’s total enterprise value, during the periods presented.
(4)  We own the Hilton La Jolla Torrey Pines and The Capital Hilton in a joint venture. The Hotel EBITDA amounts for these hotels represent the total amounts for each hotel, not our pro rata amount based on our ownership percentage. Also, Hotel EBITDA is calculated as if the Courtyard Philadelphia Downtown was operated as all other hotels for all periods presented, rather than as a triple-net lease through December 1, 2011.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA, Hotel EBITDA and AFFO.

 

 

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RISK FACTORS

You should carefully consider the following risk factors in conjunction with the other information contained in this prospectus in evaluating us and our common stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

Risks Related to Our Business and Properties

Our business is significantly influenced by the economies and other conditions in the specific markets in which we operate, particularly in the metropolitan areas where we have high concentrations of hotels.

Our hotels are located in the Washington DC, San Francisco, San Diego, Seattle, Dallas, Philadelphia and Tampa metropolitan areas. As a result, we are particularly susceptible to adverse market conditions in these areas, including industry downturns, relocation of businesses and any oversupply of hotel rooms or a reduction in lodging demand. Adverse economic developments in the markets in which we have a concentration of hotels, or in any of the other markets in which we operate, or any increase in hotel supply or decrease in lodging demand resulting from the local, regional or national business climate, could adversely affect our business, operating results and prospects.

Our investments are concentrated in the hotel industry, and our business would be adversely affected by an economic downturn in that sector.

All of our investments are concentrated in the hotel industry. This concentration may expose us to the risk of economic downturns in the hotel real estate sector to a greater extent than if our properties were more diversified across other sectors of the real estate industry.

The financial crisis and general economic slowdown, which began in late 2007, harmed the operating performance of the hotel industry generally. If these or similar events recur, our business may be harmed by declines in occupancy, average daily room rates and/or other operating revenues.

The performance of the lodging industry has been closely linked with the performance of the general economy and, specifically, growth in the U.S. GDP. We invest in hotels that are classified as luxury, upper-upscale and upscale. In an economic downturn, these types of hotels may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates. This characteristic may result from the fact that luxury, upper-upscale and upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may seek to reduce travel costs by limiting travel or seeking to reduce costs on their trips. Any economic recession will likely have an adverse effect on our business, operating results and prospects.

We face risks related to changes in the global economic and political environment, including capital and credit markets.

Our business may be harmed by global economic conditions, which recently have been volatile. Political crises in individual countries or regions, including sovereign risk related to a deterioration in the creditworthiness of or a default by local governments, has contributed to this volatility. If the global economy experiences continued volatility or significant disruptions, such disruptions or volatility could hurt the U.S. economy and our business. More specifically, in addition to experiencing reduced demand for business and leisure travel because of a slow-down in the general economy, we could be harmed by disruptions resulting from tighter credit markets or by illiquidity resulting from an inability to access credit markets to obtain cash to support operations or make distributions to our stockholders as a result of global or international developments.

 

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Failure of the hotel industry to exhibit sustained improvement or to improve as expected may adversely affect us.

A substantial part of our business plan is based on our belief that the lodging markets in which we invest will experience improving economic fundamentals in the future, despite the fact that fundamentals have already substantially improved over the last several years. In particular, our business strategy is dependent on our expectation that key industry performance indicators, especially RevPAR, will continue to improve. However, hotel industry fundamentals may not continue to improve and could deteriorate. In the event conditions in the industry do not sustain improvement or improve as we expect, or deteriorate, we may be adversely affected.

We invest in the luxury, upper-upscale and upscale segments of the lodging market, which are highly competitive and generally subject to greater volatility than most other market segments and could negatively affect our profitability.

The luxury, upper-upscale and upscale segments of the hotel business are highly competitive. Our hotel properties compete on the basis of location, room rates, quality, amenities, service levels, reputation and reservations systems, among many factors. There are many competitors in the luxury, upper-upscale and upscale segments, and many of these competitors may have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and rooms revenue at our hotels. Over-building in the lodging industry may increase the number of rooms available and may decrease occupancy and room rates. In addition, in periods of weak demand, as may occur during a general economic recession, our profitability may be negatively affected by the relatively high fixed costs of operating luxury, upper-upscale and upscale hotels. If our hotels cannot compete effectively for guests, they will earn less revenue, which would result in lower cash available for us to meet debt service obligations, operating expenses, and make requisite distributions to stockholders.

Because we depend upon Ashford Advisor and its affiliates to conduct our operations, any adverse changes in the financial condition of Ashford Advisor or its affiliates or our relationship with them could hinder our operating performance.

We depend on Ashford Advisor to manage our assets and operations. Any adverse changes in the financial condition of Ashford Advisor or its affiliates or our relationship with Ashford Advisor could hinder its ability to manage us successfully.

We depend on Ashford Advisor’s key personnel with long-standing business relationships. The loss of Ashford Advisor’s key personnel could threaten our ability to operate our business successfully.

Our future success depends, to a significant extent, upon the continued services of Ashford Advisor’s management team. In particular, the hotel industry experience of Messrs. Monty J. Bennett, Douglas A. Kessler, David A. Brooks, David J. Kimichik, Jeremy Welter, Mark L. Nunneley, Deric Eubanks and J. Robison Hays III, and the extent and nature of the relationships they have developed with hotel franchisors, operators, and owners and hotel lending and other financial institutions are critically important to the success of our business. The loss of services of one or more members of Ashford Advisor’s management team could harm our business and our prospects.

The amount of fees and incentives paid to Ashford Advisor may exceed the average of internalized expenses of our industry peers and the fees and incentives paid by other externally managed REITs to their advisors.

Pursuant to the advisory agreement between us and Ashford Advisor, we pay Ashford Advisor a quarterly base fee as well as an annual incentive fee based on total shareholder return versus our peer group. Because a portion of such fees are contingent on our performance, the fees we pay to Ashford Advisor may fluctuate over time. In addition, the amount of the base fee is based on our total enterprise value, including the aggregate

 

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principal amount of our consolidated indebtedness; and therefore, the fee increases as our indebtedness increases. The base advisory fees paid by many other externally managed REITs are based on measures other than total enterprise value. We did not conduct arm’s-length negotiations of the terms of our advisory agreement, which we entered into in connection with the spin-off. The fees payable under our advisory agreement may not be as favorable to us as if they had been negotiated on an arm’s-length basis with unaffiliated third parties. As a result, and due to the structure of our base fee and incentive fee arrangements with Ashford Advisor, there may be times when the total amount of fees and incentives paid to Ashford Advisor exceeds the average of internalized expenses of our industry peers and the fees and incentives paid by other externally managed REITs to their advisors.

We have no prior operating history, and the prior performance of Ashford Trust is not indicative of our future performance.

We have no prior operating history, and you should not rely on the performance of Ashford Trust or other real estate programs operated by Ashford Advisor to predict our future performance. We have presented information in this prospectus regarding the total returns of Ashford Trust as measured by the historical price of its common stock and its dividend history and the historical financial condition and results of operations of the portfolio of hotels Ashford Trust contributed to us. When considering this information you should consider that the historical results of Ashford Trust are not indicative of the future results that you should expect from us or our common stock. There are significant differences between Ashford Trust and us, and our financial condition and results of operations could vary significantly for the following reasons, among others:

 

    Ashford Trust did not contribute all of the hotels and other assets it owns to us.

 

    Our investment, financing and other strategies differ from those of Ashford Trust.

The operating performance of the hotels Ashford Trust contributed to us may decline and could adversely affect us. As described elsewhere in this prospectus, our future results are subject to many uncertainties and other factors that could cause our financial condition and results of operations to be materially different than that of Ashford Trust.

Our business strategy depends on acquiring additional hotels on attractive terms and the failure to do so or to otherwise manage our planned growth successfully may adversely affect our business and operating results.

We intend to acquire additional hotels in the future. We face significant competition for attractive investment opportunities from other well-capitalized investors, some of which have greater financial resources and greater access to debt and equity capital than we have. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. This competition could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms or on the terms contemplated in our business plan. As a result of such competition, we may be unable to acquire hotels that we deem attractive at prices that we consider appropriate or on terms that are satisfactory to us. If we do identify an appropriate acquisition candidate, we may not be able to successfully negotiate the terms of the acquisition. In addition, we expect to finance future acquisitions through a combination of borrowings under our secured revolving credit facility, the use of retained cash flows, property-level debt, and offerings of equity and debt securities, which may result in additional leverage or dilution to our stockholders. Any delay or failure on our part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede our growth.

In addition, we expect to compete to sell hotel properties. Availability of capital, the number of hotels available for sale and market conditions, all affect prices. We may not be able to sell hotel assets at our targeted price.

 

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There is no guarantee that Ashford Trust will sell us any of the properties that are subject to the right of first offer agreement or the option agreements.

We may not be able to acquire any of the properties that are subject to the right of first offer agreement, either because Ashford Trust does not elect to sell such properties or we are not in a position to acquire the properties when Ashford Trust elects to sell. Further, if we materially change our investment guidelines without the express consent of Ashford Advisor, no hotels acquired by Ashford Trust after the date of such change will be subject to the right of first offer. Also, if we exercise our right to purchase the properties subject to option agreements, Ashford Trust can terminate the option agreements if the value of the common units in our operating partnership payable in connection with such exercise (measured by the value of our common stock) decreases by more than 20% between the option exercise date and the closing date, and, in the case of exercise of the Pier House Resort option, Ashford Trust has elected to receive the purchase price in the form of common units in our operating partnership.

The option purchase price for the Pier House Resort may not be market price at the time the option is exercised.

If we exercise the option to purchase the Pier House Resort, the purchase price we pay for such hotel may be greater than the amount payable for a comparable property in a fully-marketed sale process. Pursuant to the option agreement related to the Pier House Resort, our purchase price for the hotel is determined based on the price that Ashford Trust paid for such hotel plus the cost of any owner-funded capital improvements made by Ashford Trust prior to our acquisition of the hotel. Accordingly, the purchase price we pay for such hotel may be greater than the amount payable for a comparable property in a fully-marketed sale process.

We may be unable to successfully integrate and operate acquired properties, which may have a material adverse effect on our business and operating results.

Even if we are able to make acquisitions on favorable terms, we may not be able to successfully integrate and operate them. We may be required to invest significant capital and resources after an acquisition to maintain or grow the properties that we acquire. In addition, we may need to adapt our management, administrative, accounting, and operational systems, or hire and retain sufficient operational staff, to integrate and manage successfully any future acquisitions of additional assets. These and other integration efforts may disrupt our operations, divert Ashford Advisor’s attention away from day-to-day operations and cause us to incur unanticipated costs. The difficulties of integration may be increased by the necessity of coordinating operations in geographically dispersed locations. Our failure to integrate successfully any acquisitions into our portfolio could have a material adverse effect on our business and operating results. Further, acquired properties may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. The failure to discover such issues prior to such acquisition could have a material adverse effect on our business and results of operations.

Because our board of directors and Ashford Advisor have broad discretion to make future investments, we may make investments that result in returns that are substantially below expectations or in net operating losses. In addition, our investment policies may be revised from time to time at the discretion of our board of directors, without a vote of our stockholders. Such discretion could result in investments with yield returns inconsistent with stockholders’ expectations.

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Ashford Trust.

We may not be able to achieve the full strategic and financial benefits that we expect will result from our separation from Ashford Trust or our realization of such benefits may be delayed or may not occur at all. For example, analysts and investors may not place a greater value on our company as a stand-alone REIT than on our businesses being a part of Ashford Trust.

 

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Our joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.

We own interests in two hotels through a joint venture and we do not have sole decision-making authority regarding these two properties. In addition, we may continue to co-invest with third parties through partnerships, joint ventures or other entities, acquiring controlling or non-controlling interests in, or sharing responsibility for, managing the affairs of a property, partnership, joint venture or other entity. We may not be in a position to exercise sole decision-making authority regarding any future properties that we may hold in a partnership or joint venture. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt, suffer a deterioration in their financial condition or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, budgets, or financing, because neither we nor the partner or co-venturer have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers.

Hotel franchise or license requirements or the loss of a franchise could adversely affect us.

We must comply with operating standards, terms, and conditions imposed by the franchisors of the hotel brands under which our hotels operate. Franchisors periodically inspect their licensed hotels to confirm adherence to their operating standards. The failure of a hotel to maintain these standards could result in the loss or cancellation of a franchise license. With respect to operational standards, we rely on our property managers to conform to such standards. Franchisors may also require us to make certain capital improvements to maintain the hotel in accordance with system standards, the cost of which can be substantial. A franchisor could condition the continuation of a franchise based on the completion of capital improvements that Ashford Advisor or our board of directors determines is not economically feasible in light of general economic conditions, the operating results or prospects of the affected hotel or other circumstances. In that event, Ashford Advisor or our board of directors may elect to allow the franchise to lapse or be terminated, which could result in a termination charge as well as a change in brand franchising or operation of the hotel as an independent hotel. In addition, when the term of a franchise expires, the franchisor has no obligation to issue a new franchise.

The loss of a franchise could have a material adverse effect on the operations and/or the underlying value of the affected hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor. Any such material adverse effect on one or more of our hotels may, in turn, have a material adverse effect on our business and operating results.

Our reliance on third-party property managers, including Remington, to operate our hotels and for a substantial majority of our cash flow may adversely affect us.

Because federal income tax laws restrict REITs and their subsidiaries from operating or managing hotels, third parties must operate our hotels. A REIT may lease its hotels to taxable REIT subsidiaries in which the REIT can own up to a 100% interest. A taxable REIT subsidiary (“TRS”) pays corporate-level income tax and may retain any after-tax income. A REIT must satisfy certain conditions to use the TRS structure. One of those conditions is that the TRS must hire, to manage the hotels, an “eligible independent contractor” (“EIC”) that is actively engaged in the trade or business of managing hotels for parties other than the REIT. An EIC cannot (i) own more than 35% of the REIT, (ii) be owned more than 35% by persons owning more than 35% of the REIT, or (iii) provide any income to the REIT (i.e., the EIC cannot pay fees to the REIT, and the REIT cannot own any debt or equity securities of the EIC). Accordingly, while we may lease hotels to a TRS that we own, the

 

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TRS must engage a third-party operator to manage the hotels. Thus, our ability to direct and control how our hotels are operated is less than if we were able to manage our hotels directly.

We are parties to hotel management agreements under which unaffiliated third-party property managers manage our hotels. We have also entered into a mutual exclusivity agreement with Remington contemplating Remington’s management of hotels we acquire in the future, including the Pier House Resort, if we exercise our option to acquire such hotel. We do not supervise any of the property managers or their respective personnel on a day-to-day basis. Without such supervision, our property managers may not manage our properties in a manner that is consistent with their respective obligations under the applicable management agreement or our obligations under our hotel franchise agreements, be negligent in their performance, engage in criminal or fraudulent activity, or otherwise default on their respective management obligations to us. If any of these events occur, our relationships with any franchisors may be damaged, we may be in breach of our franchise agreement, and we could incur liabilities resulting from loss or injury to our property or to persons at our properties. In addition, from time to time, disputes may arise between us and our third-party managers regarding their performance or compliance with the terms of the hotel management agreements, which in turn could adversely affect us. If we are unable to resolve such disputes through discussions and negotiations, we may choose to terminate our management agreement, litigate the dispute or submit the matter to third-party dispute resolution, the expense of which may be material and the outcome of which may harm our business, operating results or prospects.

Our management agreements could adversely affect our ability to sell or finance our hotel properties.

Our management agreements do not allow us to replace hotel managers on relatively short notice or with limited cost and also contain other restrictive covenants. We may enter into additional such agreements or acquire properties subject to such agreements in the future. For example, the terms of a management agreement may restrict our ability to sell a property unless the purchaser is not a competitor of the manager, assumes the management agreement and meets other conditions. Also, the terms of a long-term management agreement encumbering our property may reduce the value of the property. When we enter into or acquire properties subject to any such management agreements, we may be precluded from taking actions that we believe to be in our best interest and could incur substantial expense as a result.

All of our hotels currently operate under Marriott or Hilton brands; therefore, we are subject to risks associated with concentrating our portfolio in just two brand families.

All eight of our hotels utilize brands owned by Marriott or Hilton. (Remington will manage the Pier House Resort if we exercise our option to acquire that hotel.) As a result, our success is dependent in part on the continued success of Marriott and Hilton and their respective brands. We believe that building brand value is critical to increase demand and build customer loyalty. Consequently, if market recognition or the positive perception of Marriott and/or Hilton is reduced or compromised, the goodwill associated with the Marriott- and Hilton-branded hotels in our portfolio may be adversely affected. Furthermore, if our relationship with Marriott or Hilton were to deteriorate as a result of disputes regarding the management of our hotels or for other reasons, Marriott and/or Hilton might terminate its current management agreements or franchise licenses with us or decline to manage or provide franchise licenses for hotels we may acquire in the future.

If we cannot obtain additional capital, our growth will be limited.

We are required to distribute to our stockholders at least 90% of our REIT taxable income, excluding net capital gains, each year to qualify and maintain our qualification as a REIT. As a result, our retained earnings available to fund acquisitions, development, or other capital expenditures are nominal. As such, we rely upon the availability of additional debt or equity capital to fund these activities. Our long-term ability to grow through acquisitions or development, which is an important strategy for us, will be limited if we cannot obtain additional financing or equity capital. Market conditions may make it difficult to obtain financing or equity capital, and we may not be able to obtain additional debt or equity financing or obtain it on favorable terms.

 

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Two of our hotels are subject to ground leases; if we are found to be in breach of a ground lease or are unable to renew a ground lease, our business could be materially and adversely affected.

Two of our hotels are on land subject to ground leases. Accordingly, we only own a long-term leasehold or similar interest in those two hotels. If we are found to be in breach of a ground lease, we could lose the right to use the hotel. In addition, unless we can purchase a fee interest in the underlying land and improvements or extend the terms of these leases before their expiration, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. We may not be able to renew any ground lease upon its expiration. Our ability to exercise any extension options relating to our ground leases is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options. If we lose the right to use a hotel due to a breach or non-renewal of the ground lease, we would be unable to derive income from such hotel and would be required to purchase an interest in another hotel to attempt to replace that income, which could materially and adversely affect our business, operating results and prospects.

We will not recognize any increase in the value of the land or improvements subject to our ground leases and may only receive a portion of compensation paid in any eminent domain proceeding with respect to the hotel.

Unless we purchase a fee interest in the land and improvements subject to our ground leases, we will not have any economic interest in the land or improvements at the expiration of our ground leases. As a result, we will not share in any increase in value of the land or improvements beyond the term of a ground lease, notwithstanding our capital outlay to purchase our interest in the hotel or fund improvements thereon, and will lose our right to use the hotel. Furthermore, if the state or federal government seizes a hotel subject to a ground lease under its eminent domain power, we may only be entitled to a portion of any compensation awarded for the seizure.

Tax indemnification obligations that will apply if we exercise our option to acquire the Crystal Gateway Marriott hotel and then dispose of such hotel or reduce the debt encumbering such hotel below a specified threshold could limit our operating flexibility.

If we exercise our option to acquire the Crystal Gateway Marriott hotel and then dispose of it in a taxable transaction or reduce the debt secured by that hotel below $43.3 million prior to July 13, 2016, Ashford Trust OP will be obligated to pay certain tax liabilities of the partners of the entity that originally contributed the hotel to Ashford Trust OP, under an existing tax reporting and protection agreement. Pursuant to the terms of the Crystal Gateway option agreement, if we acquire the Crystal Gateway Marriott we will be required to indemnify Ashford Trust OP for any such tax liabilities that it is required to pay because of our actions.

The potential tax liability generally consists of the aggregate federal, state and local income tax liability incurred by the partners of the original contributor to Ashford Trust (using an assumed combined federal, state and local income tax rate at the then-highest applicable marginal rate for such contributor) with respect to the gain allocated to the contributor under Section 704(c) of the Code. The terms of the original agreement, and accordingly the terms of our indemnification agreement with Ashford Trust OP, require the payment of a gross up of the tax indemnity payment for the amount of income taxes due as a result of the tax indemnity payment. While the tax indemnity obligations will not contractually limit our ability to conduct our business in the way we desire, if we elect to acquire the Crystal Gateway Marriott, we are less likely to dispose of it in a taxable transaction during the indemnity period. Instead, we would either hold the property for the remainder of the indemnity period or seek to transfer the property in a tax-deferred like-kind exchange. In addition, a condemnation of the property could trigger our tax indemnification obligations.

If we were to acquire the Crystal Gateway Marriott and then immediately dispose of it in a taxable transaction, our estimated total tax indemnification obligation to Ashford Trust OP, including the gross-up payment, would be approximately $35 million. See “Certain Relationships and Related Person Transactions—Acquisition of the Initial Properties—Tax Indemnity.”

 

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The expansion of our business into new markets outside of the United States will expose us to risks relating to owning hotels in those international markets.

As part of our business strategy, we may acquire hotels that meet our investment criteria and are located in international gateway markets. We may have difficulty managing our expansion into new geographic markets where we have limited knowledge and understanding of the local economy, an absence of business relationships in the area, or unfamiliarity with local governmental and permitting procedures and regulations. There are risks inherent in conducting business outside of the United States, which include risks related to:

 

    foreign employment laws and practices, which may increase the reimbursable costs incurred under our advisory agreement associated with international employees;

 

    foreign tax laws, which may provide for income or other taxes or tax rates that exceed those of the U.S. and which may provide that foreign earnings that are repatriated, directly or indirectly, are subject to dividend withholding tax requirements or other restrictions;

 

    compliance with and unexpected changes in regulatory requirements or monetary policy;

 

    the willingness of domestic or international lenders to provide financing and changes in the availability, cost and terms of such financing;

 

    adverse changes in local, political, economic and market conditions;

 

    increased costs of insurance coverage related to terrorist events;

 

    changes in interest rates and/or currency exchange rates;

 

    regulations regarding the incurrence of debt; and

 

    difficulties in complying with U.S. rules governing REITs while operating outside of the United States.

Any of these factors could affect adversely our ability to obtain all of the intended benefits of expanding internationally. If we do not effectively manage this expansion and successfully integrate the international hotels into our organization, our operating results and financial condition may be adversely affected.

Compliance with international laws and regulations may require us to incur substantial costs.

The operations of our international properties, if any, will be subject to a variety of U.S. and international laws and regulations, including the United States Foreign Corrupt Practices Act (“FCPA”). Before we invest in international markets, we will adopt policies and procedures designed to promote compliance with the FCPA and other anti-corruption laws, but we may not continue to be found to be operating in compliance with, or be able to detect violations of, any such laws or regulations. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international properties might be subject and the manner in which existing laws might be administered or interpreted.

Exchange rate fluctuations could affect adversely our financial results.

If we acquire hotels or conduct operations in an international jurisdiction, currency exchange rate fluctuations could adversely affect our results of operations and financial position. If we have international operations, a portion of our revenue and expenses could be generated in foreign currencies such as the Euro, the Canadian dollar and the British pound sterling. Any steps we take to reduce our exposure to fluctuations in the value of foreign currencies, such as entering into foreign exchange agreements or currency exchange hedging arrangements will not eliminate such risk entirely. To the extent that we are unable to match revenue received in foreign currencies with expenses paid in the same currency, exchange rate fluctuations could have a negative impact on our results of operations and financial condition. Additionally, because our consolidated financial results are reported in U.S. dollars, if we generate revenues or earnings in other currencies, the conversion of such amounts into U.S. dollars can result in an increase or decrease in the amount of our revenues or earnings.

 

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For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

Upon the completion of the spin-off, we became subject to reporting and other obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In April 2012, the Jump Start Our Business Startups Act (the “JOBS Act”) was enacted into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are an “emerging growth company” as defined in the JOBS Act. For as long as we are an emerging growth company, which may be up to five full fiscal years, unlike other public companies, we will not be required to:

 

    provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;

 

    comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies under Section 102(b)(1) of the JOBS Act;

 

    comply with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

    comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise;

 

    provide certain disclosure regarding executive compensation; or

 

    hold stockholder advisory votes on executive compensation.

We are subject to financial reporting and other requirements for which the accounting, internal audit and other management systems and resources of our company and Ashford Advisor may not be adequately prepared and we may not be able to accurately report our financial results.

Following the separation and distribution, we became subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404(a) requires annual management assessments of the effectiveness of our internal controls over financial reporting. These reporting and other obligations place significant demands on the management, administrative, operational, internal audit and accounting resources of our company and those of Ashford Advisor and may cause us to incur significant expenses. We and/or Ashford Advisor may need to upgrade these systems or create new systems; implement additional financial and management controls, reporting systems and procedures; expand the internal audit function; and hire additional accounting, internal audit and finance staff. If we and/or Ashford Advisor, as applicable, are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

For as long as we are an “emerging growth company” under the recently enacted JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b). We could be an emerging growth company for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

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Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital as and when we need it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company” and because we will have an extended transition period for complying with accounting standards that are newly issued or revised after April 5, 2012, our common stock may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. Without access to additional capital, we may not be able to expand our business or take other actions we determine to be in our best interests. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.

We are increasingly dependent on information technology, and potential cyber attacks, security problems or other disruption and expanding social media vehicles present new risks.

Ashford Advisor and our hotel managers rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. Ashford Advisor and our hotel managers may purchase some of our information technology from vendors, on whom our systems will depend, and Ashford Advisor will rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information. We depend upon the secure transmission of this information over public networks. Ashford Advisor’s and hotel managers’ networks and storage applications could be subject to unauthorized access by hackers or others through cyber attacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means, or may be breached due to operator error, malfeasance or other system disruptions. In some cases, it will be difficult to anticipate or immediately detect such incidents and the damage they cause. Any significant breakdown, invasion, destruction, interruption or leakage of information from Ashford Advisor’s or hotel managers’ systems could harm our reputation and business.

In addition, the use of social media could cause us to suffer brand damage or information leakage. Negative posts or comments about us, our hotel managers or our hotels on any social networking website could damage our or our hotels’ reputations. In addition, employees or others might disclose non-public sensitive information relating to our business through external media channels. The continuing evolution of social media will present us with new challenges and risks.

Changes in laws, regulations, or policies may adversely affect our business.

The laws and regulations governing our business or the regulatory or enforcement environment at the federal level or in any of the states in which we operate may change at any time and may have an adverse effect on our business. For example, the Patient Protection and Affordable Care Act of 2010, as it is phased in over time, will significantly affect the administration of health care services and could significantly impact our hotel managers’ cost of providing employees with health care insurance. We are unable to predict how this or any other future legislative or regulatory proposals or programs will be administered or implemented or in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our results of operations and financial condition. Our inability to remain in compliance with regulatory requirements in a particular jurisdiction could have a material adverse effect on our operations in that market and on our reputation generally. Applicable laws or regulations may be amended or construed differently and new laws and regulations may be adopted, either of which could materially adversely affect our business, financial condition, or results of operations.

 

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We may from time to time be subject to litigation, which could have a material adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.

We may from time to time be subject to litigation. Some of these claims may result in defense costs, settlements, fines or judgments against us, some of which may not be covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have a material adverse impact on our financial position and results of operations. Negative publicity regarding claims or judgments made against us or involving our hotels may damage our, or our hotels’, reputations. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

Risks Related to our Debt Financing

Increases in interest rates could increase our debt payments.

As of September 30, 2013, we had approximately $624.0 million of outstanding indebtedness, including approximately $198.7 million of variable interest rate debt, and we expect to incur additional indebtedness, including additional variable-rate debt. If we exercise our option to acquire the Pier House Resort, assuming it is encumbered by its existing debt at the time of the acquisition, we expect our property-level indebtedness to be approximately $693.0 million, including approximately $267.7 million of variable interest rate debt (based on outstanding principal balances at September 30, 2013). If we exercise our options to acquire both the Pier House Resort and Crystal Gateway Marriott, assuming both are encumbered by their existing debt at the time of the acquisition, we expect our property-level indebtedness to be approximately $810.7 million of debt, including approximately $267.7 million of variable interest rate debt (based on outstanding principal balances at September 30, 2013). Increases in interest rates increase our interest costs on our variable-rate debt as well as any future fixed rate debt we may incur at higher interest rates, and interest we pay reduces our cash available for distributions, expansion, working capital and other uses. Moreover, periods of rising interest rates heighten the risks described immediately below under “—We may be unable to make required payments on our debt, and our charter and bylaws do not limit the amount of debt we may incur.”

We may be unable to make required payments on our debt, and our charter and bylaws do not limit the amount of debt we may incur.

Our charter and bylaws do not limit the amount or percentage of indebtedness that we may incur, and we are subject to risks normally associated with debt financing, including the risk that we may not be able to meet our debt service obligations or refinance our debt as it becomes due. We may not be able to refinance any maturing indebtedness, and any such refinancing may not be on terms as favorable as the terms of the maturing indebtedness. In addition, we may not be able to obtain funds by selling assets or raising equity to repay maturing indebtedness. We may not achieve our targeted low-leverage capital structure and limit the sum of the outstanding principal amount of our consolidated indebtedness and the liquidation preference of any outstanding preferred equity, less cash, cash equivalents and marketable securities, to not more than 5.0x EBITDA, for the 12-month period preceding the incurrence of such debt or the issuance of such preferred equity, for a substantial period of time.

If we do not meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on the foreclosure but would not receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash for distributions to our stockholders of that income.

Our future indebtedness may be cross-collateralized and, consequently, a default on any such indebtedness could cause us to lose part or all of our investment in multiple properties.

 

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Under the Advisory Agreement, Ashford Advisor is entitled to receive a quarterly base fee from us that is based on our total enterprise value. This fee increases as the aggregate principal amount of our consolidated indebtedness (including our proportionate share of debt of any entity that is not consolidated but excluding our joint venture partners’ proportionate share of consolidated debt) increases. As a result, any increase in our consolidated indebtedness will also increase the fees we pay to Ashford Advisor. The structure of this fee may incentivize Ashford Advisor to increase our indebtedness when it is not in the best interest of our stockholders to do so.

In addition, changes in economic conditions, our financial condition or operating results or prospects could:

 

    result in higher interest rates on our variable-rate debt,

 

    reduce the availability of debt financing generally or debt financing at favorable rates,

 

    reduce cash available for distribution to stockholders, or

 

    increase the risk that we could be forced to liquidate assets to repay debt.

Covenants, “cash trap” provisions or other terms in our mortgage loans and our secured revolving credit facility, as well as any future credit facility, could limit our flexibility and adversely affect our financial condition or our qualification as a REIT.

Some of our loan agreements and our secured revolving credit facility contain financial and other covenants. If we violate covenants in any debt agreements, we could be required to repay all or 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 also prohibit us from borrowing unused amounts under our lines of credit, even if repayment of some or all the borrowings is not required. In addition, financial covenants under our current or future debt obligations could impair our planned business strategies by limiting our ability to borrow beyond certain amounts or for certain purposes.

Some of our loan agreements also contain cash trap provisions that are triggered if the performance of our hotels decline. When these provisions are triggered, substantially all of the profit generated by our hotels is deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our various lenders. Cash is not distributed to us at any time after the cash trap provisions have been triggered until we have cured performance issues. This could affect our liquidity and our ability to make distributions to our stockholders. If we are not able to make distributions to our stockholders, we may not qualify as a REIT. See “Material Federal Income Tax Considerations—Distribution Requirements.”

Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on your investment.

We expect to use various derivative financial instruments to protect us against interest rate risks. The use of derivative financial instruments to hedge against such risk involves numerous uncertainties, such as the risk that the counterparties fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable. These instruments may also generate income that may not be treated as qualifying REIT income. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. Our hedging strategy and the derivatives that we use may not adequately offset the risk of interest rate volatility and our hedging transactions could result in losses that may reduce the overall return on your investment in our company.

 

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Risks Related to Conflicts of Interest

Our separation and distribution agreement, our advisory agreement, the mutual exclusivity agreement, the master management agreement and other agreements entered into in connection with the spin-off were not negotiated on an arms-length basis, and we may pursue less vigorous enforcement of their terms because of conflicts of interest with certain of our executive officers and directors and key employees of Ashford Advisor.

Because our officers and two of our directors are also key employees of Ashford Advisor or its affiliates and have ownership interests in Ashford Trust, our separation and distribution agreement, our advisory agreement, mutual exclusivity agreement and other agreements entered into in connection with the separation and distribution were not negotiated on an arms-length basis, and we did not have the benefit of arms-length negotiations of the type normally conducted with an unaffiliated third party. As a result, the terms, including fees and other amounts payable, may not be as favorable to us as the terms under an arms-length agreement. Furthermore, we may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationship with Ashford Advisor and Remington.

Termination by us of our advisory agreement with Ashford Advisor without cause would be difficult and costly.

The initial term of our advisory agreement with Ashford Advisor ends on November 19, 2018, and will be extended automatically for one-year renewal terms on each anniversary date thereafter unless previously terminated. Our board will review Ashford Advisor’s performance and fees annually and, following the five-year initial term the advisory agreement may be terminated by us with 180 days’ prior notice upon the affirmative vote of at least two-thirds of our independent directors based upon a good faith finding that either: (1) there has been unsatisfactory performance by Ashford Advisor that is materially detrimental to us and our subsidiaries taken as a whole, or (2) the base fee and/or incentive fee is not fair (and Ashford Advisor does not offer to negotiate a lower fee that two-thirds of our independent directors determine is fair).

If we terminate the advisory agreement, Ashford Advisor will be paid a termination fee equal to three times the sum of the average annual base and incentive fees for the 24-month period immediately preceding the termination. Additionally, if a change of control transaction is conditioned upon the termination of the advisory agreement, we will have the right to terminate the advisory agreement upon the payment of a termination fee equal to either:

 

    if Ashford Advisor’s common stock is not publicly traded, 14 times the earnings of Ashford Advisor attributable to our advisory agreement less costs and expenses (the “net earnings”) for the 12 months preceding termination of the advisory agreement; or

 

    if at the time of the termination notice, Ashford Advisor’s common stock is publicly traded separate from the common stock of Ashford Trust, 1.1 multiplied by the greater of (i) 12 times the net earnings of Ashford Advisor for the 12 months preceding the termination of the advisory agreement or (ii) the earnings multiple (based on net earnings after taxes) for Ashford Advisor’s common stock for the 12 months preceding the termination of the advisory agreement multiplied by the net earnings of Ashford Advisor for the same 12 month period; or (iii) the simple average of the earnings multiples (based on net earnings after taxes) for Ashford Advisor’s common stock for each of the three fiscal years preceding the termination of the advisory agreement, multiplied by the net earnings of Ashford Advisor for the 12 months preceding the termination of the advisory agreement;

plus, in either case, a gross-up amount for assumed federal and state tax liability, based on an assumed tax rate of 40%. Any such termination fee will be payable on or before the termination date. The obligation to pay this termination fee increases the cost to us of terminating our advisory agreement, which adversely affects our ability to terminate Ashford Advisor without cause.

 

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Ashford Advisor is owned by Ashford Trust and may be able to direct attractive investment opportunities to Ashford Trust and away from us.

Ashford Advisor is a subsidiary of Ashford Trust, a publicly-traded hotel REIT, with investment objectives that are similar to ours. So long as Ashford Advisor is our external advisor, our governing documents require us to include two persons designated by Ashford Advisor as candidates for election as director at any stockholder meeting at which directors are to be elected. Each of our executive officers and two of our directors also serve as key employees and as officers of Ashford Advisor and Ashford Trust. Furthermore, Mr. Monty J. Bennett, our chief executive officer and chairman, is also the chief executive officer and chairman of Ashford Trust. Our advisory agreement requires Ashford Advisor to present investments that satisfy our investment guidelines to us before presenting them to Ashford Trust or any future client of Ashford Advisor. Our board may modify or supplement our investment guidelines from time to time so long as we do not change our investment guidelines in such a way as to be directly competitive with all or any portion of Ashford Trust’s investment guidelines as of the date of the advisory agreement. If we materially change our investment guidelines without the express consent of Ashford Advisor, then Ashford Advisor will not have an obligation to present investment opportunities and instead Ashford Advisor will use its best judgment to allocate investment opportunities to us and other entities it advises, taking into account such factors as Ashford Advisor deems relevant, in its discretion, subject to any then existing obligations of Ashford Advisor to such other entities. However, some portfolio investment opportunities may include hotels that satisfy our investment objectives as well as hotels that satisfy the investment objectives of Ashford Trust or other entities advised by Ashford Advisor. If the portfolio cannot be equitably divided, Ashford Advisor will necessarily have to make a determination as to which entity will be presented with the opportunity. In such a circumstance, our advisory agreement requires Ashford Advisor to allocate portfolio investment opportunities between us and Ashford Trust or other entities advised by Ashford Advisor in a fair and equitable manner, consistent with our, Ashford Trust’s and such other entities’ investment objectives. In making this determination, Ashford Advisor, using substantial discretion, is required to consider the investment strategy and guidelines of each entity with respect to acquisition of properties, portfolio concentrations, tax consequences, regulatory restrictions, liquidity requirements, leverage and other factors deemed appropriate. In making the allocation determination, Ashford Advisor has no obligation to make any such investment opportunity available to us. Ashford Advisor and Ashford Trust have agreed that any new investment opportunities that satisfy our investment guidelines will be presented to our board of directors; however, our board will have only ten business days to make a determination with respect to such opportunity prior to it being available to Ashford Trust. The above mentioned dual responsibilities may create conflicts of interest for our officers that could result in decisions or allocations of investments that may benefit Ashford Trust more than they benefit our company, and Ashford Trust may compete with us with respect to certain investments that we may want to acquire.

Ashford Advisor and its key employees, who are our executive officers, face competing demands relating to their time and this may adversely affect our operations.

We rely on Ashford Advisor and its employees for the day-to-day operation of our business. Ashford Advisor is owned by Ashford Trust, and each of the key employees of Ashford Advisor are executive officers of Ashford Trust. Because Ashford Advisor’s key employees have duties to Ashford Trust as well as to our company, we do not have their undivided attention and they face conflicts in allocating their time and resources between our company and Ashford Trust. Ashford Advisor may also manage other entities in the future. During turbulent market conditions or other times when we need focused support and assistance from Ashford Advisor, other entities for which Ashford Advisor also acts as an external advisor or Ashford Trust may likewise require greater focus and attention, placing competing high levels of demand on the limited time and resources of Ashford Advisor’s key employees. We may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed by persons working exclusively for us.

We must pay a minimum advisory fee to Ashford Advisor regardless of our performance.

Ashford Advisor is entitled to receive a quarterly base fee from us that is based on our total enterprise value (as defined in our advisory agreement), regardless of the performance of our portfolio. Ashford Advisor’s

 

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entitlement to nonperformance-based compensation might reduce its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio.

Conflicts of interest with Remington could result in our hotel-level management acting other than in our stockholders’ best interest.

We expect Remington will manage certain of the hotels we acquire in the future, including Pier House Resort if we exercise our option to acquire that hotel. We intend to use the proceeds from this offering to exercise our option to acquire the Pier House Resort. Conflicts of interest in general and specifically relating to Remington may lead to management decisions that are not in our stockholders’ best interest. Our chief executive officer and chairman, Mr. Monty J. Bennett, serves as the chief executive officer of Remington. Mr. Monty J. Bennett and his father, Mr. Archie Bennett, Jr., beneficially own 100% of Remington.

We entered into a mutual exclusivity agreement and a master management agreement with Remington. To the extent we have the right or control the right to direct such matters, the exclusivity agreement requires us to engage Remington to provide certain project management and development services for our initial properties and to engage Remington to provide, under the master management agreement, property management, project management and development services for all future properties that we acquire, unless our independent directors either (i) unanimously vote not to hire Remington, or (ii) based on special circumstances or past performance, by a majority vote, elect not to engage Remington because they have determined, in their reasonable business judgment, that it would be in our best interest not to engage Remington or that another manager or developer could perform the duties materially better. As one of the two beneficial owners of Remington, which would receive any property management, project management, development and termination fees payable by us under the master management agreement, Mr. Monty J. Bennett may influence our decisions to sell, acquire, or develop hotels when it is not in the best interest of our stockholders to do so.

Mr. Monty J. Bennett’s ownership interests in and management obligations to Remington present him with conflicts of interest in making management decisions related to the commercial arrangements between us and Remington, and his management obligations to Remington reduce the time and effort he spends managing our company. Our board of directors has adopted a policy that requires all material approvals, actions or decisions which we have the right to make under the master management agreement with Remington be approved by a majority or, in certain circumstances, all, of our independent directors. However, given the authority and/or operational latitude provided to Remington under the master management agreement, Mr. Monty J. Bennett, as the chief executive officer of Remington, could take actions or make decisions that are not in our stockholders’ best interest or that are otherwise inconsistent with his obligations to us under the master management agreement or our obligations under the applicable franchise agreements.

Remington’s ability to exercise significant influence over the determination of the competitive set for any hotels managed by Remington could artificially enhance the perception of the performance of a hotel, making it more difficult to use managers other than Remington for future properties.

Under our master management agreement with Remington, we have the right to terminate Remington based on the performance of the applicable hotel, subject to the payment of a termination fee. The determination of performance is based on the applicable hotel’s gross operating profit margin and its RevPAR penetration index, which provides the relative revenue per room generated by a specified property as compared to its competitive set. For each hotel managed by Remington, its competitive set consists of a small group of hotels in the relevant market that we and Remington believe are comparable for purposes of benchmarking the performance of such hotel. Remington has significant influence over the determination of the competitive set for any of our hotels that it manages. Remington could artificially enhance the perception of the performance of a hotel by selecting a competitive set that is not performing well or is not comparable to the Remington-managed hotel, thereby making it more difficult for us to elect not to use Remington for future hotel management.

 

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Remington may be able to pursue lodging investment opportunities that compete with us.

Pursuant to the terms of our mutual exclusivity agreement with Remington, if investment opportunities that satisfy our investment criteria are identified by Remington or its affiliates, Remington will give us a written notice and description of the investment opportunity. We will have 10 business days to either accept or reject the investment opportunity. If we reject the opportunity, Remington may then pursue such investment opportunity, subject to a right of first refusal in favor of Ashford Trust pursuant to an existing agreement between Ashford Trust and Remington, on materially the same terms and conditions as offered to us. If we reject such an investment opportunity, either Ashford Trust or Remington could pursue the opportunity and compete with us. In such a case, Mr. Monty J. Bennett, our chief executive officer and chairman, in his capacity as chairman and chief executive officer of Ashford Trust or as chief executive officer of Remington could be in a position of directly competing with us, and Remington may compete with us with respect to certain investments that we may want to acquire.

Our fiduciary duties as the general partner of our operating partnership could create conflicts of interest, which may impede business decisions that could benefit our stockholders.

As the general partner of our operating partnership, we have fiduciary duties to the other limited partners in our operating partnership, the discharge of which may conflict with the interests of our stockholders. The limited partners of our operating partnership have agreed that, in the event of a conflict in the fiduciary duties owed by us to our stockholders and, in our capacity as general partner of our operating partnership, to such limited partners, we are under no obligation to give priority to the interests of such limited partners. In addition, persons holding common units have the right to vote on certain amendments to the operating partnership agreement (which require approval by a majority in interest of the limited partners, including us) and individually to approve certain amendments that would adversely affect their rights. These voting rights may be exercised in a manner that conflicts with the interests of our stockholders. For example, we cannot modify the rights of limited partners to receive distributions as set forth in the operating partnership agreement in a manner that adversely affects their rights without their consent, even though such modification might be in the best interest of our stockholders.

In addition, conflicts may arise when the interests of our stockholders and the limited partners of our operating partnership diverge, particularly in circumstances in which there may be an adverse tax consequence to the limited partners. Tax consequences to holders of common units upon a sale or refinancing of our properties may cause the interests of Ashford Trust or the key employees of Ashford Advisor (who are executive officers of Ashford Trust and have ownership interests in Ashford Trust) to differ from our stockholders. As a result of unrealized built-in gain attributable to contributed property at the time of contribution, some holders of common units, including Ashford Trust, may suffer different and more adverse tax consequences than holders of our common stock upon the sale or refinancing of the properties owned by our operating partnership, including disproportionately greater allocations of items of taxable income and gain upon a realization event. As those holders will not receive a correspondingly greater distribution of cash proceeds, they may have different objectives regarding the appropriate pricing, timing and other material terms of any sale or refinancing of certain properties, or whether to sell or refinance such properties at all. As a result, Ashford Advisor, which is owned by Ashford Trust, may cause us to sell, not sell or refinance certain properties, even if such actions or inactions might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest.

Our conflicts of interest policy may not adequately address all of the conflicts of interest that may arise with respect to our activities.

We have adopted a conflicts of interest policy to address specifically some of the conflicts relating to our activities which requires the approval of a majority of our disinterested directors to approve any transaction, agreement or relationship in which any of our directors or officers, Ashford Advisor or its employees or Ashford

 

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Trust has an interest. This policy may not be adequate to address all of the conflicts that may arise. In addition, it may not address such conflicts in a manner that is favorable to us.

Risks Related to Hotel Investments

We are subject to general risks associated with operating hotels.

We own hotel properties, which have different economic characteristics than many other real estate assets and a hotel REIT is structured differently than many other types of REITs. A typical office property, for example, has long-term leases with third-party tenants, which provides a relatively stable long-term stream of revenue. Hotels, on the other hand, generate revenue from guests that typically stay at the hotel for only a few nights, which causes the room rate and occupancy levels at each of our hotels to change every day, and results in earnings that can be highly volatile.

In addition, our hotels are subject to various operating risks common to the hotel industry, many of which are beyond our control, including, among others, the following:

 

    competition from other hotel properties in our markets;

 

    over-building of hotels in our markets, which results in increased supply and adversely affects occupancy and revenues at our hotels;

 

    dependence on business and commercial travelers and tourism;

 

    increases in operating costs due to inflation, increased energy costs and other factors that may not be offset by increased room rates;

 

    changes in interest rates and in the availability, cost and terms of debt financing;

 

    increases in assessed property taxes from changes in valuation or real estate tax rates;

 

    increases in the cost of property insurance;

 

    changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance;

 

    unforeseen events beyond our control, such as terrorist attacks, travel related health concerns which could reduce travel, including pandemics and epidemics such as H1N1 influenza (swine flu), avian bird flu and SARS, imposition of taxes or surcharges by regulatory authorities, travel-related accidents, travel infrastructure interruptions and unusual weather patterns, including natural disasters such as hurricanes, tsunamis or earthquakes;

 

    adverse effects of international, national, regional and local economic and market conditions and increases in energy costs or labor costs and other expenses affecting travel, which may affect travel patterns and reduce the number of business and commercial travelers and tourists;

 

    adverse effects of a downturn in the lodging industry; and

 

    risks generally associated with the ownership of hotel properties and real estate, as we discuss in more detail below.

These factors could adversely affect our hotel revenues and expenses, which in turn could adversely affect our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders.

We may have to make significant capital expenditures to maintain our hotel properties, and any development activities we undertake may be more costly than we anticipate.

Our hotels have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures, and equipment. Managers or franchisors of our hotels also require that

 

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we make periodic capital improvements pursuant to our management agreements or as a condition of maintaining franchise licenses. Generally, we are responsible for the cost of these capital improvements. As part of our long-term growth strategy, we may also develop hotels. Hotel renovation and development involves substantial risks, including:

 

    construction cost overruns and delays;

 

    the disruption of operations and displacement of revenue at operating hotels, including revenue lost while rooms, restaurants or meeting space under renovation are out of service;

 

    the cost of funding renovations or developments and inability to obtain financing on attractive terms;

 

    the return on our investment in these capital improvements or developments failing to meet expectations;

 

    inability to obtain all necessary zoning, land use, building, occupancy, and construction permits;

 

    loss of substantial investment in a development project if a project is abandoned before completion;

 

    environmental problems; and

 

    disputes with franchisors or property managers regarding compliance with relevant franchise agreements or management agreements.

If we have insufficient cash flow from operations to fund needed capital expenditures, then we will need to borrow, sell assets or sell additional equity securities to fund future capital improvements.

The hotel business is seasonal, which affects our results of operations from quarter to quarter.

The hotel industry is seasonal in nature. This seasonality can cause quarterly fluctuations in our financial condition and operating results, including in the amount available for distributions on our common stock. Our quarterly operating results may be adversely affected by factors outside our control, including weather conditions and poor economic factors in certain markets in which we operate. Our cash flows may not be sufficient to offset any shortfalls that occur as a result of these fluctuations. As a result, we may have to reduce distributions or enter into short-term borrowings in certain quarters in order to make distributions to our stockholders. Such borrowings may not be available on favorable terms, if at all.

The cyclical nature of the lodging industry may cause fluctuations in our operating performance, which could have a material adverse effect on our business and operating results.

The lodging industry historically has been highly cyclical in nature. Fluctuations in lodging demand and, therefore, hotel operating performance, are caused largely by general economic and local market conditions, which subsequently affect levels of business and leisure travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry’s performance, and overbuilding has the potential to further exacerbate the negative impact of an economic recession. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. An adverse change in lodging fundamentals could result in returns that are substantially below our expectations or result in losses, which could have a material adverse effect on our business and operating results.

Many of our real estate-related costs are fixed, and will not decrease even if revenue from our hotels decreases.

Many costs, such as real estate taxes, insurance premiums and maintenance costs, generally are not reduced even when a hotel is not fully occupied, room rates decrease or other circumstances cause a reduction in revenues. In addition, newly acquired or renovated hotels may not produce the revenues we anticipate immediately, or at all, and the hotel’s operating cash flow may be insufficient to pay the operating expenses and

 

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debt service associated with these new hotels. If we are unable to offset real estate costs with sufficient revenues across our portfolio, our operating results and our ability to make distributions to our stockholders may be adversely affected.

The increasing use of Internet travel intermediaries by consumers may adversely affect our profitability.

Some of our hotel rooms are booked through Internet travel intermediaries, including, but not limited to, Travelocity.com, Expedia.com and Priceline.com. As Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our management companies. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These intermediaries hope that consumers will eventually develop brand loyalties to their reservations system rather than to the brands under which our properties are franchised. If the amount of sales made through Internet intermediaries increases significantly and results in a decrease in consumer loyalty to the brands under which our hotels are franchised, our rooms revenues may be lower than expected, and our profitability may be adversely affected.

Our revenues and profitability may be adversely affected by increased use of business-related technology, which may reduce the need for business-related travel.

The increased use of teleconference and video-conference technology by businesses could result in decreased business travel as companies increase the use of technologies that allow multiple parties from different locations to participate at meetings without traveling to a centralized meeting location. To the extent that such technologies play an increased role in day-to-day business and the necessity for business-related travel decreases, hotel room demand may decrease and our revenues, profitability and ability to make distributions to our stockholders may be adversely affected.

Future terrorist attacks or changes in terror alert levels could materially and adversely affect our business.

Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality industries since 2001, often disproportionately to the effect on the overall economy. The extent of the impact that actual or threatened terrorist attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be determined, but any such attacks or the threat of such attacks could have a material adverse effect on travel and hotel demand, our ability to finance our business and our ability to insure our hotels. Any of these events could materially and adversely affect our business, our operating results and our prospects.

We are subject to risks associated with the employment of hotel personnel, particularly with respect to hotels that employ unionized labor.

Our third-party managers are responsible for hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our hotels, we still are subject to many of the costs and risks generally associated with the hotel labor force, particularly with respect to hotels with unionized labor. From time to time, hotel operations may be disrupted as a result of strikes, lockouts, public demonstrations or other negative actions and publicity. We also may incur increased legal costs and indirect labor costs as a result of contract disputes or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to increased labor costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. We do not have the ability to affect the outcome of these disputes.

 

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Risks Related to the Real Estate Industry

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our hotel properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to sell promptly one or more hotel properties for reasonable prices in response to changing economic, financial, and investment conditions is limited.

The real estate market is affected by many factors that are beyond our control, including:

 

    adverse changes in international, national, regional and local economic and market conditions;

 

    changes in interest rates and in the availability, cost, and terms of debt financing;

 

    changes in governmental laws and regulations, fiscal policies, and zoning and other ordinances, and the related costs of compliance with laws and regulations, fiscal policies and zoning and other ordinances;

 

    the ongoing need for capital improvements, particularly in older structures;

 

    changes in operating expenses; and

 

    civil unrest, acts of war or terrorism, and acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured and underinsured losses.

We may decide to sell hotel properties in the future. We cannot predict whether we will be able to sell any hotel property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements. In addition, when we acquire a hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These and other factors could impede our ability to respond to adverse changes in the performance of our hotel properties or a need for liquidity.

Increases in property taxes would increase our operating costs, reduce our income and adversely affect our ability to make distributions to our stockholders.

Each of our hotel properties is subject to real and personal property taxes. These taxes may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. If property taxes increase, our financial condition, results of operations and our ability to make distributions to our stockholders could be materially and adversely affected and the market price of our common stock could decline.

The costs of compliance with or liabilities under environmental laws may harm our operating results.

Operating expenses at our hotels could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations. In addition, our hotel properties may be subject to environmental liabilities. An owner or operator of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property. We may face liability regardless of:

 

    our knowledge of the contamination;

 

    the timing of the contamination;

 

    the cause of the contamination; or

 

    the party responsible for the contamination.

 

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There may be environmental problems associated with our hotel properties of which we are unaware. Some of our hotel properties use, or may have used in the past, underground tanks for the storage of petroleum-based or waste products that could create a potential for release of hazardous substances. If environmental contamination exists on a hotel property, we could become subject to strict, joint and several liabilities for the contamination if we own the property.

The discovery of material environmental liabilities at our properties could subject us to unanticipated significant costs. The presence of hazardous substances on a property may adversely affect our ability to sell the property on favorable terms or at all, and we may incur substantial remediation costs.

Our environmental insurance policies may not provide sufficient coverage for any environmental liabilities at our properties. In addition, if environmental liabilities are discovered during the underwriting of the insurance policies for any property that we acquire in the future, we may be unable to obtain insurance coverage for the liabilities at commercially reasonable rates or at all. We may experience losses as a result of any of these events.

Numerous treaties, laws and regulations have been enacted to regulate or limit carbon emissions. Changes in the regulations and legislation relating to climate change, and complying with such laws and regulations, may require us to make significant investments in our hotels and could result in increased energy costs at our properties.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. Some of the properties in our portfolio may contain microbial matter such as mold and mildew. As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property. In addition, the presence of significant mold could expose us to liability from hotel guests, hotel employees, and others if property damage or health concerns arise.

Compliance with the Americans with Disabilities Act and fire, safety, and other regulations may require us to incur substantial costs.

All of our properties are required to comply with the Americans with Disabilities Act of 1990, as amended (the “ADA”). The ADA requires that “public accommodations,” such as hotels, be made accessible to people with disabilities. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. government or an award of damages to private litigants, or both. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes, and other land use regulations as they may be adopted by governmental agencies and bodies and become applicable to our properties. Any requirement to make substantial modifications to our hotel properties, whether to comply with the ADA or other changes in governmental rules and regulations, could be costly.

We may experience uninsured or underinsured losses.

We maintain property and casualty insurance with respect to our hotel properties and other insurance, in each case, with loss limits and coverage thresholds deemed reasonable by our management team (and to satisfy the requirements of lenders and franchisors). In doing so, we make decisions with respect to what deductibles, policy limits, and terms are reasonable based on management’s experience, our risk profile, the loss history of

 

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our property managers and our properties, the nature of our properties and our businesses, our loss prevention efforts, and the cost of insurance.

Various types of catastrophic losses may not be insurable or may not be economically insurable. In the event of a substantial loss, our insurance coverage may not cover the full current market value or replacement cost of our lost investment. Inflation, changes in building codes and ordinances, environmental considerations, and other factors might cause insurance proceeds to be insufficient to fully replace or renovate a hotel after it has been damaged or destroyed. Accordingly, it is possible that:

 

    the insurance coverage thresholds that we have obtained may not fully protect us against insurable losses (i.e., losses may exceed coverage limits);

 

    we may incur large deductibles that adversely affect our earnings;

 

    we may incur losses from risks that are not insurable or that are not economically insurable; and

 

    current coverage thresholds may not continue to be available at reasonable rates.

In the future, we may choose not to maintain terrorism insurance on any of our properties. As a result, one or more large uninsured or underinsured losses could have a material adverse effect on our business, operating results and financial condition.

Each of our current lenders requires us to maintain certain insurance coverage thresholds. If a lender does not believe we have complied with these requirements, the lender could obtain additional coverage thresholds and seek payment from us, or declare us in default under the loan documents. In the former case, we could spend more for insurance than we otherwise deem reasonable or necessary or, in the latter case, the hotels collateralizing one or more loans could be foreclosed upon. In addition, a material casualty to one or more hotels collateralizing loans may result in the insurance company applying to the outstanding loan balance insurance proceeds that otherwise would be available to repair the damage caused by the casualty, which would require us to fund the repairs through other sources, The lender may also foreclose on the hotels if there is a material loss that is not insured.

Risks Related to Our Organization and Structure

Our charter contains provisions that may delay or prevent a change of control transaction.

Our charter contains 9.8% ownership limits. For the purpose of preserving our REIT qualification, our charter prohibits direct or constructive ownership by any person of more than:

 

    9.8% of the lesser of the total number or value of the outstanding shares of our common stock, or

 

    9.8% of the lesser of the total number or value of the outstanding shares of any class or series of our preferred stock or any other stock of our company,

unless our board of directors grants a waiver.

Our charter’s constructive ownership rules are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our common stock by an individual or entity could nevertheless cause that individual or entity to own constructively in excess of 9.8% of the outstanding common stock, and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common stock in excess of the ownership limit without the consent of our board of directors will be void, and could result in the shares being automatically transferred to a charitable trust.

 

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Our board of directors may create and issue a class or series of preferred stock without stockholder approval.

Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval. Our preferred stock issuances could have the effect of delaying or preventing someone from taking control of us, even if our stockholders believe that a change in control was in their best interests.

Certain provisions in the partnership agreement for our operating partnership may delay or prevent unsolicited acquisitions of us.

Provisions in the partnership agreement for our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:

 

    redemption rights of qualifying parties;

 

    transfer restrictions on our common units;

 

    the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners; and

 

    the right of the limited partners to consent to transfers of the general partnership interest and mergers of the operating partnership under specified circumstances.

Certain provisions of Maryland law could inhibit changes in control.

Title 3, Subtitle 8 of the Maryland General Corporation Law (“MGCL”) permits our board of directors, without stockholder approval, to implement certain takeover defenses. To the extent we implement these takeover defenses, they may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deterring or preventing a charge in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.

In addition, certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:

 

    “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and special stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

Our charter, bylaws, the partnership agreement for our operating partnership and Maryland law contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. See “Material

 

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Provisions of Maryland Law and of Our Charter and Bylaws—The Board of Directors,” “—Business Combinations,” “—Control Share Acquisitions,” “—Maryland Unsolicited Takeovers Act,” “—Advance Notice of Director Nominations and New Business” and “Partnership Agreement.”

Our board of directors can take many actions without stockholder approval.

Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our board of directors can do the following:

 

    terminate Ashford Advisor under certain conditions pursuant to our advisory agreement;

 

    amend or revise at any time and from time to time our investment, financing, borrowing and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization and operations;

 

    amend our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements;

 

    subject to the terms of our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;

 

    issue additional shares without obtaining stockholder approval, which could dilute the ownership of our then-current stockholders;

 

    amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series, without obtaining stockholder approval;

 

    classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval;

 

    employ and compensate affiliates;

 

    direct our resources toward investments that do not ultimately appreciate over time; and

 

    determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving you, as a stockholder, the right to vote on whether we should take such actions.

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our charter requires us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result,

 

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we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers if actions are taken against them in their capacity as directors and officers.

Risks Related to this Offering

The shares of common stock issued in this offering and securities eligible for future sale, including the 20% of our company that Ashford Trust OP owns on a fully diluted basis as of December 18, 2013, may adversely affect the market price of our securities.

Our common stock has only traded on the NYSE since November 20, 2013. Assuming the underwriters do not exercise their option to purchase additional shares, we are selling             shares of our common stock in this offering, an amount equal to         % of common stock outstanding prior to the offering. Also, the three-month average trading volume in our common stock as reported by the NYSE as of December 17, 2013 was only 270,911 shares per day. We cannot predict the effect, if any, of this offering or of future sales of securities, or the availability of securities for future sales, on the market price of our outstanding securities. The shares of our common stock that Ashford Trust distributed to its stockholders in the spin-off generally may be sold immediately in the public market. Some Ashford Trust stockholders, including possibly some of our large stockholders, may sell our common stock that they received in the distribution for a variety of reasons. For example, Ashford Trust stockholders may sell our stock because our business profile or market capitalization as an independent company does not fit their investment objectives or because our common stock is not included in certain indices after the distribution. Sales of substantial amounts of shares of our common stock in the public market, or upon exchange of the common units owned by Ashford Trust OP or others, or speculation that such sales might occur, could adversely affect the liquidity of the market for our common stock or the prevailing market price of our common stock. In addition, the exchange of common units for common stock, the exercise of any stock options or the vesting of any restricted stock granted under the 2013 Equity Incentive Plan and the Advisor Equity Incentive Plan, the issuance of our common stock or common units in connection with property, portfolio or business acquisitions and other issuances of our common stock or common units could adversely affect the market price of our common stock. Ashford Trust OP owns common units constituting 20% of our company on a fully diluted basis as of December 18, 2013. Beginning one year from the issuance date, these common units may be redeemed by Ashford Trust OP for cash or, at our option, shares of our common stock on a one-for-one basis. Ashford Trust OP is a party to an agreement that provides for registration rights with respect to shares issued upon redemption of the common units. So long as Ashford Trust OP or Ashford Trust retains significant ownership in us and is able to sell such shares in the public markets, the market price of our common stock may be adversely affected. Moreover, the existence of shares of our common stock reserved for issuance as restricted shares or upon exchange of options or common units may adversely affect the terms upon which we may be able to obtain additional capital through the sale of equity securities. Any future sales by us of our common stock or securities convertible into common stock may be dilutive to existing stockholders.

Each of our executive officers and directors and certain other existing security holders (including Ashford Trust OP) have entered into lock-up agreements with respect to their shares of common stock and common units of our operating partnership, restricting the sale of their shares and units, for 90 days. The representatives, at any time, may release all or a portion of the shares and units subject to the foregoing lock-up provisions. If the restrictions under such agreements are waived, the affected shares may be available for sale into the market, which could reduce the market price for our common stock.

Broad market fluctuations could negatively impact the market price of our stock.

The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Some of the factors that could affect our stock price or result in fluctuations in the price or trading volume of our common stock include:

 

    actual or anticipated variations in our quarterly operating results;

 

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    changes in our operations or earnings estimates or publication of research reports about us or the industry;

 

    changes in market valuations of similar companies;

 

    adverse market reaction to any increased indebtedness we incur in the future;

 

    additions or departures of key management personnel;

 

    actions by institutional stockholders;

 

    failure to meet and maintain REIT qualification;

 

    speculation in the press or investment community; and

 

    general market and economic conditions.

In addition, the stock market has experienced price and volume fluctuations that have affected the market prices of many companies in industries similar or related to ours and may have been unrelated to operating performances of these companies. These broad market fluctuations could reduce the market price of our common stock.

Our cash available for distribution to stockholders may be insufficient to pay distributions at any particular levels or in amounts sufficient to maintain our REIT qualification, and we may borrow funds to make distributions.

As a REIT, we are required to distribute at least 90% of our REIT taxable income each year, excluding net capital gains, to our stockholders. However, all distributions will be authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and will depend upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, EBITDA, FFO and results of operations, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements and such other factors as our board deems relevant. Our ability to make distributions may be adversely affected by the risk factors described in this prospectus.

In the event of downturns in our financial condition or operating results, economic conditions or otherwise, we may be unable to declare or pay distributions to our stockholders to the extent required to maintain our REIT qualification. We may be required either to fund distributions from borrowings under our secured revolving credit facility or to reduce our distributions. If we borrow to fund distributions, our interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

We may elect to pay dividends on our common stock in cash or a combination of cash and shares of securities as permitted under federal income tax laws governing REIT distribution requirements. In addition, some of our distributions may include a return of capital. To the extent that we make distributions in excess of our current and accumulated earnings and profits (as determined for federal income tax purposes), such distributions would generally be considered a return of capital for U.S. federal income tax purposes to the extent of the holder’s adjusted tax basis in its shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent that distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. See “Material Federal Income Tax Considerations—Distribution Requirements.”

The market price of our common stock could be adversely affected by our level of cash distributions.

The market value of the equity securities of a REIT is based primarily upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales or refinancings, and is secondarily based upon the real estate market value of the underlying assets. For that reason,

 

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our common stock may trade at prices that are higher or lower than our net asset value per share. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock.

Future offerings of debt securities, which would be senior to our common stock upon liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, convertible securities, and classes of preferred stock or common stock or classes of preferred units. Upon liquidation, holders of our debt securities and preferred stock or preferred units and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Preferred stock and preferred units, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our securities and diluting their securities holdings in us.

This offering may be dilutive, and there may be future dilution of our common stock.

After giving effect to the issuance of common stock in this offering, the receipt of the expected net proceeds and the use of those proceeds as described under “Use of Proceeds,” this offering may have a dilutive effect on our estimated earnings per share and funds from operations per share. The actual amount of dilution cannot be determined at this time and will be based on numerous factors. Additionally, subject to the 90-day lock-up restrictions described in “Underwriting,” we are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable or exercisable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities in the future. The market price of our common stock could decline as a result of sales of a large number of common stock in the market after this offering or the perception that such sales could occur.

We may not acquire any of the properties in our current acquisition pipeline.

We currently intend to use a portion of the net proceeds from this offering to acquire one or more properties in our acquisition pipeline, including the Pier House Resort. However, we may not acquire any of the properties in our acquisition pipeline because the acquisition of any property in our pipeline may be subject to:

 

    the negotiation and execution of definitive purchase and sale agreements;

 

    our completion of satisfactory due diligence with respect to the property; and

 

    satisfaction of customary closing conditions, including the receipt of third-party consents and approvals.

If we are unable to acquire any of these properties, we may experience delays in locating and securing attractive alternative real estate investments. These potential acquisitions, whether or not they are successful, will require substantial time and attention from our management. In addition, we will incur significant expenses in connection with our due diligence, including legal fees. To the extent we do not acquire properties that we are currently reviewing to acquire, these expenses will not be offset by revenues from these properties.

 

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We may use a portion of the net proceeds from this offering to make distributions to our shareholders, which would, among other things, reduce our cash available to develop or acquire properties and may reduce the returns on your investment in our common shares.

Prior to the time we have fully invested the net proceeds of this offering, we may fund distributions to our shareholders out of the net proceeds of this offering, which would reduce the amount of cash we have available to acquire properties and may ultimately reduce the returns on your investment in our common shares. The use of these net proceeds for distributions to shareholders could adversely affect our financial results. In addition, funding distributions from the net proceeds of this offering may constitute a return of capital to our shareholders, which would have the effect of reducing each shareholder’s tax basis in our common shares.

Risks Related to Our Status as a REIT

Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.

We intend to operate in a manner intended to allow us to qualify as a REIT for U.S. federal income tax purposes. We believe that our organization and current and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT commencing with our taxable year ending December 31, 2013. However, we may not qualify or remain qualified as a REIT. In connection with this offering we will receive an opinion from Gibson, Dunn & Crutcher LLP that we are organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws and our proposed method of operation will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for the taxable year ending December 31, 2013 and subsequent taxable years. Stockholders should be aware that Gibson, Dunn & Crutcher LLP’s opinion is based upon customary assumptions, is conditioned upon certain representations made by us as to factual matters, including representations regarding the nature of our assets and the conduct of our business, is not binding upon the Internal Revenue Service (“IRS”) or any court and speaks only as of the date issued. Gibson, Dunn & Crutcher LLP’s opinion is further conditioned upon an opinion, we received from Andrews Kurth LLP, upon which Gibson, Dunn & Crutcher LLP is entitled to rely, that Ashford Trust has been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws for its five taxable years ending December 31, 2009 through December 31, 2013. We have not received any rulings from the IRS concerning our qualification as a REIT. In addition, Gibson, Dunn & Crutcher LLP’s opinion is based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the federal tax laws. Gibson, Dunn & Crutcher LLP will not review our compliance with those tests on a continuing basis. Accordingly, it is possible that our actual results of operations for any particular taxable year may not satisfy such requirements. Gibson, Dunn & Crutcher LLP’s opinion does not foreclose the possibility that we may have to use one or more REIT savings provisions discussed below, which could require us to pay an excise or penalty tax (which could be material) in order for us to maintain our REIT qualification.

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:

 

    we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

 

    we could be subject to the federal alternative minimum tax and possibly increased state and local income taxes; and

 

    unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

 

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In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. See “Material Federal Income Tax Considerations” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.

If Ashford Trust failed to qualify as a REIT in any of its 2009 through 2013 taxable years, we would be prevented from electing to qualify as a REIT under applicable Treasury Regulations.

Under applicable Treasury Regulations, if Ashford Trust failed to qualify as a REIT in any of its 2009 through 2013 taxable years, unless Ashford Trust’s failure to qualify as a REIT was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Ashford Trust failed to qualify.

Even if we qualify and remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we qualify and remain qualified for taxation as a REIT, we may be subject to certain federal, state, and local taxes on our income and assets, as well as foreign taxes to the extent that we own assets or conduct operations in international jurisdictions. For example:

 

    We will be required to pay tax on undistributed REIT taxable income.

 

    We may be required to pay the “alternative minimum tax” on our items of tax preference.

 

    If we have net income from the disposition of foreclosure property held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay tax on that income at the highest corporate rate.

 

    If we sell a property in a “prohibited transaction,” our gain from the sale would be subject to a 100% penalty tax.

 

    Each of our taxable REIT subsidiaries is a fully taxable corporation and will be subject to federal and state taxes on its income.

 

    We may experience increases in our state and local income tax burden. Over the past several years, certain states have significantly changed their income tax regimes in order to raise revenues. The changes enacted include the taxation of modified gross receipts (as opposed to net taxable income), the suspension of and/or limitation on the use of net operating loss deductions, increases in tax rates and fees, the addition of surcharges, and the taxation of our partnership income at the entity level. Facing mounting budget deficits, more state and local taxing authorities have indicated that they are going to revise their income tax regimes in this fashion and/or eliminate certain federally allowed tax deductions such as the REIT dividends paid deduction.

Failure to make required distributions would subject us to U.S. federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.

Our TRS lessee structure increases our overall tax liability.

Our TRS lessees are subject to federal, state and local income tax on their taxable income, which consists of the revenues from the hotel properties leased by our TRS lessees, net of the operating expenses for such hotel

 

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properties and rent payments to us. Accordingly, although our ownership of our TRS lessees allows us to participate in the operating income from our hotel properties in addition to receiving rent, that operating income is fully subject to income tax. The after-tax net income of our TRS lessees is available for distribution to us.

If our leases with our TRS lessees are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.

To qualify as a REIT, we will be required to satisfy two gross income tests, pursuant to which specified percentages of our gross income must be passive income, such as rent. For the rent paid pursuant to the hotel leases with our TRS lessees, which constitutes substantially all of our gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. We have structured our leases, and intend to structure any future leases, so that the leases will be respected as true leases for federal income tax purposes, but the IRS may not agree with this characterization. If the leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests applicable to REITs and likely would fail to qualify as a REIT.

Our ownership of TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from hotels that are operated by eligible independent contractors pursuant to hotel management agreements. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Our TRSs are subject to federal, foreign, state and local income tax on their taxable income, and their after-tax net income is available for distribution to us but is not required to be distributed to us. We believe that the aggregate value of the stock and securities of our TRSs is less than 25% of the value of our total assets (including our TRS stock and securities).

We monitor the value of our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition, we scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax described above. For example, in determining the amounts payable by our TRSs under our leases, we engaged a third party to prepare transfer pricing studies to ascertain whether the lease terms we established are on an arm’s-length basis as required by applicable Treasury Regulations. However, as illustrated by the discussion below under “—One of our TRSs may be subject to significant taxes and penalties based on transactions that occurred prior to the separation and distribution,” the receipt of a transfer pricing study does not prevent the IRS from challenging the arm’s length nature of the lease terms between a REIT and its TRS lessees. Consequently, we may not be able to avoid application of the 100% excise tax discussed above.

One of our TRSs may be subject to significant taxes and penalties based on transactions that occurred prior to the separation and distribution.

As part of our separation and distribution from Ashford Trust, Ashford Trust contributed to us its indirect ownership in CHH III Tenant Parent Corp. (“CHH”), the parent of the TRS lessees for two of our properties,

 

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which we have elected to treat as a TRS. In September 2010, the IRS completed an audit of CHH for the tax year ended December 31, 2007. The IRS issued a notice of proposed adjustment that reduced the amount of rent Ashford Trust charged CHH. In connection with the TRS audit, the IRS also selected Ashford Trust for audit for the same tax year. In October 2011, the IRS issued an income tax adjustment to Ashford Trust as an alternative to the TRS proposed adjustment, based on the REIT 100% federal excise tax on Ashford Trust’s share of the amount by which the rent was held to be greater than the arm’s length rate. Ashford Trust and CHH appealed their cases to the IRS Appeals office. The IRS Appeals Office reviewed the cases in 2012 and in July 2013, issued “no-change letters” for Ashford Trust and CHH indicating that the 2007 tax returns were accepted as filed and the examinations resulted in no deficiencies. U.S. federal income tax assessment statutes of limitations generally limit the time the IRS has to make assessments to within three years after a return is due or filed, whichever is later. The IRS requested and Ashford Trust agreed to extend the assessment statute of limitations for both Ashford Trust and CHH for the 2007 tax year to March 31, 2014. Accordingly, the IRS has the right to reopen the cases until March 31, 2014. However, the IRS typically only reopens closed cases in very limited circumstances, none of which Ashford Trust believes are applicable to these cases.

In June 2012, the IRS completed audits of CHH and Ashford Trust for the tax years ended December 31, 2008 and 2009. With respect to the 2009 tax year, the IRS has not proposed any adjustments to CHH or Ashford Trust. For the 2008 tax year, the IRS has issued notices of proposed adjustments for both Ashford Trust and CHH. The Ashford Trust adjustment is for $3.3 million of U.S. federal excise taxes and represents the amount by which the IRS asserts that the rent charged to the TRS was greater than the arms’ length rate pursuant to IRC Section 482. The CHH adjustment is for $1.6 million of additional income which would equate to approximately $467,000 of additional U.S. federal income taxes and potential state income taxes of $83,000, net of federal benefit. The TRS adjustment represents the IRS’ imputation of compensation to the TRS for agreeing to be a party to the lessor entity’s bank loan agreement. A written protest was filed requesting an IRS Appeals Office review. The IRS has granted the Appeals Office review and has assigned the same Appeals team that oversaw the 2007 cases to oversee the 2008 cases. The initial Appeals Office conference for the 2008 cases occurred in August 2013. One or more conferences with the Appeals Office will be required to resolve these cases and Ashford Trust anticipates these will occur in 2014.

To the extent the ultimate resolution of the 2008 case results in additional tax owed by CHH, we, through our ownership of CHH, will bear the burden of those additional taxes. Consequently, as part of the separation and distribution, Ashford Trust agreed to indemnify us and CHH for (i) any expenses incurred in connection with the audits and (ii) any additional taxes, interest or penalty incurred upon resolution of the audit and any tax liability incurred as a result of such indemnity payment. However, if Ashford Trust is unable to pay the amounts required under the indemnity for any reason, we, through our ownership of CHH, would bear the burden of the additional taxes, interest and penalties owed by CHH.

If our hotel managers do not qualify as “eligible independent contractors,” we would fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. We lease all of our hotels to our TRS lessees. A TRS lessee will not be treated as a “related party tenant,” and will not be treated as directly operating a lodging facility, which is prohibited, to the extent the TRS lessee leases properties from us that are managed by an “eligible independent contractor.”

We believe that the rent paid by our TRS lessee is qualifying income for purposes of the REIT gross income tests and that our TRSs qualify to be treated as taxable REIT subsidiaries for federal income tax purposes, but the IRS could challenge this treatment and a court could sustain such a challenge. If the IRS were successful in challenging this treatment, it is possible that we would fail to meet the asset tests applicable to REITs and substantially all of our income would fail to qualify for the gross income tests. If we failed to meet either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless certain relief provisions applied. If our hotel managers do not qualify as “eligible independent contractors,” we

 

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would fail to qualify as a REIT. Each of the hotel management companies that enters into a management contract with our TRS lessees must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRS lessees to be qualifying income for our REIT income test requirements. Among other requirements, in order to qualify as an eligible independent contractor a manager must not own more than 35% of our outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the ownership interests of the manager, taking into account only owners of more than 5% of our shares and, with respect to ownership interests in such managers that are publicly-traded, only holders of more than 5% of such ownership interests. Complex ownership attribution rules apply for purposes of these 35% thresholds. Although we intend to monitor ownership of our shares by our property managers and their owners, it is possible that these ownership levels could be exceeded.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our shares of beneficial interest. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may have a material adverse effect on our performance.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

To qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities, and qualified REIT real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffer adverse tax consequences. As a result, we may be required to liquidate otherwise attractive investments.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

As a REIT, we must distribute at least 90% of our annual REIT taxable income, excluding net capital gains, (subject to certain adjustments) to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.

From time to time, we may generate taxable income greater than our net income for financial reporting purposes or our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices, or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce the value of our equity. We may elect to pay dividends on our common stock in cash or a combination of cash and shares as permitted under federal income tax laws governing REIT distribution requirements.

 

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We may pay taxable dividends in our common stock and cash, in which case stockholders may sell our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable dividends that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued. Accordingly, it is unclear whether and to what extent we will be able to make taxable dividends payable in cash and common stock.

If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay taxable dividends of our common stock and cash, although we may choose to do so in the future.

The prohibited transactions tax may limit our ability to dispose of our properties.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property. We may not be able to comply with the safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction. Consequently, we may choose not to engage in certain sales of our properties or we may conduct such sales through our TRS, which would be subject to federal and state income taxation.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal and state and local income taxes on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return received by our stockholders.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum federal income tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified dividend income. Individuals, trusts and estates whose income exceeds certain thresholds are also subject to a 3.8% Medicare tax on dividends received from us. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT

 

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corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

We may be subject to adverse legislative or regulatory tax changes that could effectively reduce the market price of our common stock.

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the U.S. federal income tax laws, regulations or administrative interpretations.

If our operating partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as a REIT and suffer other adverse consequences.

We believe that our operating partnership will be treated as a partnership for federal income tax purposes. As a partnership, our operating partnership is not subject to federal income tax on its income. Instead, each of its partners, including us, is allocated, and may be required to pay tax with respect to, its share of our operating partnership’s income. The IRS could challenge the status of our operating partnership or any other subsidiary partnership in which we own an interest as a partnership for federal income tax purposes, and a court could sustain such a challenge. If the IRS were successful in treating our operating partnership or any such other subsidiary partnership as an entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our operating partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its partners, including us.

Qualifying as a REIT involves highly technical and complex provisions of the Code. Your investment in our common stock has various federal, state, and local income tax risks that could affect the value of your investment.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which, in certain instances, only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. New legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. We strongly urge you to consult your tax advisor concerning the effects of federal, state, and local income tax law on an investment in our common stock. See “Material Federal Income Tax Considerations” in this prospectus for a description of the provisions of the Code relevant to your investment in our common stock.

 

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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This prospectus contains certain forward looking statements that are subject to various risks and uncertainties. Forward looking statements are generally identifiable by use of forward looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Additionally, statements regarding the following subjects are forward-looking by their nature:

 

    our business and investment strategy;

 

    our projected operating results, including cash available for distribution, and dividend rates;

 

    our ability to obtain future financing arrangements;

 

    our understanding of our competition;

 

    market trends;

 

    projected capital expenditures;

 

    anticipated acquisitions; and

 

    the impact of technology on our operations and business.

Forward looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward looking statements are based on reasonable assumptions, taking into account all information currently available to us, our actual results and performance could differ materially from those set forth in our forward looking statements. Factors that could have a material adverse effect on our forward looking statements include, but are not limited to:

 

    the factors referenced in this prospectus, including those set forth under the section captioned “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and “Our Business and Properties;”

 

    general volatility of the capital markets, the general economy or the hospitality industry, whether the result of market events or otherwise;

 

    our ability to deploy the capital contributions we received in the spin-off and raise additional capital at reasonable costs to repay debts, invest in our properties and fund future acquisitions;

 

    unanticipated increases in financing and other costs, including a rise in interest rates;

 

    the degree and nature of our competition;

 

    actual and potential conflicts of interest with Ashford Trust, Remington, our executive officers and our non-independent directors;

 

    changes in personnel of Ashford Advisor or the lack of availability of qualified personnel;

 

    changes in governmental regulations, accounting rules, tax rates and similar matters;

 

    legislative and regulatory changes, including changes to the Code and related rules, regulations and interpretations governing the taxation of REITs; and

 

    limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes.

When considering forward looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. The matters summarized under “Risk Factors” and elsewhere in this prospectus could cause our actual results and performance to differ significantly from those contained in our

 

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forward looking statements. Accordingly, we cannot guarantee future results or performance. Readers are cautioned not to place undue reliance on any of these forward looking statements, which reflect our views as of the date of this prospectus. Furthermore, we do not intend to update any of our forward looking statements after the date of this prospectus to conform these statements to actual results and performance, except as may be required by applicable law.

Smith Travel Research, PKF Hospitality Research, LLC or other independent industry sources provided the market data and industry forecasts and projections used in this prospectus. These forecasts and projections are forward looking statements and subject to the qualifications and uncertainties that apply to other forward looking statements in this prospectus.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of our common stock in this offering will be approximately $         million, or approximately $         million if the underwriters exercise their option to purchase additional shares of common stock in full, after deducting the underwriting discount and estimated offering expenses payable by us.

We intend to use a portion of the net proceeds of this offering to acquire the Pier House Resort. See “Our Business and Properties—Our Option Hotels—Pier House Resort, Key West, FL.” We also intend to use the proceeds of this offering to acquire additional properties in the ordinary course of business in a manner consistent with our investment objectives and strategies and, to a lesser extent, for general corporate purposes and working capital.

Pending the permanent use of the net proceeds of this offering, we intend to invest the net proceeds in cash, cash equivalents, U.S. government securities and other high-quality interest-bearing, short-term investment-grade securities, money-market accounts or other investments that are consistent with our intention to maintain our qualification as a REIT and our intention not to be deemed an investment company under the Investment Company Act of 1940, as amended.

 

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MARKET PRICE INFORMATION

Our common stock has been listed and traded on the NYSE under the symbol “AHP” since November 20, 2013. Prior to that time, there was no public market for our common stock. At the close of business on December 17, 2013, the closing price for our common stock was $19.59 per share and there were 119 holders of record. The following table sets forth the range of high and low sales prices of our common stock for the period beginning on November 20, 2013, the date our common stock commenced trading on the NYSE, and ending on December 17, 2013.

 

2013

   High      Low  

Period beginning on November 20, 2013 and ending on December 17, 2013

   $ 22.10       $ 18.80   

 

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DISTRIBUTION POLICY

On December 16, 2013, we announced a cash dividend of $0.05 per share of common stock. The common stock dividend will be paid on January 15, 2014 to stockholders of record as of the close of business on December 31, 2013.

We intend to make quarterly distributions to our common stockholders. To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  (i) 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  (ii) 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  (iii) any excess non-cash income (as determined under the Code). See “Material Federal Income Tax Considerations.”

Distributions made by us are authorized and determined by our board of directors in its sole discretion out of funds legally available therefor and are dependent upon a number of factors, including restrictions under applicable law, actual and projected financial condition, liquidity, EBITDA, FFO and results of operations, the revenue we actually receive from our properties, our operating expenses, our debt service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, our REIT taxable income, the annual REIT distribution requirements and such other factors as our board of directors deems relevant. For more information regarding risk factors that could materially and adversely affect our ability to make distributions, please see “Risk Factors.” We expect that, at least initially, our distributions may exceed our net income under GAAP because of non-cash expenses included in net income. To the extent that our cash available for distribution is less than 90% of our REIT taxable income, we may consider various means to cover any such shortfall, including borrowing under our secured revolving credit facility or other loans, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related or debt securities or declaring taxable stock dividends. In addition, our charter allows us to issue preferred stock that could have a preference on distributions, and if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock. We cannot assure you that our distribution policy will not change in the future.

Distributions in excess of our current and accumulated earnings and profits will not be taxable to a taxable U.S. stockholder under current U.S. federal income tax law to the extent those distributions do not exceed the stockholder’s adjusted tax basis in his or her common stock, but rather will reduce the adjusted basis of the shares. In that case, the gain (or loss) recognized on the sale of those shares or upon our liquidation will be increased (or decreased) accordingly. To the extent those distributions exceed a taxable U.S. stockholder’s adjusted tax basis in his or her shares, they generally will be treated as a gain realized from the taxable disposition of those shares. The percentage of distributions to our stockholders that exceeds our current and accumulated earnings and profits may vary substantially from year to year. For a more complete discussion of the tax treatment of distributions to holders of our common stock, see “Material Federal Income Tax Considerations.”

 

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CAPITALIZATION

The following table sets forth:

 

    our audited historical consolidated capitalization as of September 30, 2013;

 

    our unaudited pro forma combined consolidated capitalization as of September 30, 2013, to give effect to the completion of the separation and distribution;

 

    our unaudited pro forma combined consolidated capitalization as of September 30, 2013, to give effect to the completion of the separation and distribution and the exercise of the options to acquire the Pier House Resort and Crystal Gateway Marriott; and

 

    our unaudited pro forma combined consolidated capitalization as of September 30, 2013, as adjusted to give effect to the sale of             shares of common stock in this offering at an assumed public offering price of $     per share (the last reported sale price of our common stock on the NYSE on                     , 2013), net of the underwriting discount and estimated offering expenses payable by us, and the application of the net proceeds as described in “Use of Proceeds.”

You should read this table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical and pro forma financial statements and related notes appearing elsewhere in this prospectus.

 

     As of September 30, 2013
     Historical      Hotel
Group Historical
Post Spin-off
    Pro Forma Options
Exercised
    Pro Forma
As
Adjusted
     (audited)      (unaudited)     (unaudited)     (unaudited)
     (In thousands, except share information)

Cash and cash equivalents

   $ 1       $ 135,480      $ 112,384     

Liabilities:

         

Indebtedness

   $     —       $ 624,029      $ 810,655     

Redeemable noncontrolling interest in operating partnership

             103,942        221,091     

Equity:

         

Common stock, $0.01 par value per share; 200,000,000 shares authorized; 100, 16,129,112, 16,129,112 and              shares issued and outstanding, respectively

   $       $ 161      $ 161     

Owner’s equity

     1         203,872        203,872     

Noncontrolling interests in consolidated entities

             (2,436     (2,436  
  

 

 

    

 

 

   

 

 

   

 

Total stockholder’s equity

     1         201,597        201,597     
  

 

 

    

 

 

   

 

 

   

 

Total Capitalization

   $ 1       $ 929,568      $ 1,233,343     
  

 

 

    

 

 

   

 

 

   

 

 

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(1)  Does not include 8,776,153 shares of common stock reserved for issuance upon redemption of common units of Ashford Prime OP issued to Ashford Trust OP in connection with the spin-off; 1,600,000 shares of common stock reserved for issuance to Ashford Advisor under our Advisor Equity Incentive Plan; 850,000 shares of common stock reserved for issuance to our directors, executive officers and other Ashford Advisor employees under our 2013 Equity Incentive Plan; any shares for which the common units of Ashford Prime OP we may issue to purchase the Pier House Resort or the Crystal Gateway Marriott may be redeemed; any shares we may issue to Ashford Advisor in payment of any portion of the incentive fee; and any shares for which common units of Ashford Prime OP we may issue to Ashford Advisor in payment of any portion of the incentive fee may be redeemed.

 

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SELECTED HISTORICAL FINANCIAL INFORMATION

You should read the following selected financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical combined consolidated financial statements and related notes included elsewhere in this prospectus.

The selected combined consolidated historical financial information is a combination of the historical financial information for the eight properties that were contributed to us as part of the separation and distribution. These properties and certain related assets and liabilities are reflected in the combined consolidated financial statements as if they were owned in an entity separate from Ashford Trust during such periods; however they were not owned in a separate legal entity during such periods.

We have not presented the historical financial information of Ashford Hospitality Prime, Inc. because prior to the completion of the spin-off on November 19, 2013, it had no activity other than the issuance to Ashford TRS of 100 shares of common stock in connection with the initial capitalization of our company and activity in connection with the separation and distribution. Therefore, we do not believe a discussion of the historical results would be meaningful.

The selected historical combined consolidated financial information as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 has been derived from the audited financial statements appearing elsewhere in this prospectus. The selected historical combined consolidated financial information as of December 31, 2010, 2009 and 2008 and for each of the two years in the period ended December 31, 2009 has been derived from unaudited financial statements not included in this prospectus. The summary historical combined consolidated financial information as of September 30, 2013 and September 30, 2012 has been derived from the unaudited financial statements appearing elsewhere in this prospectus. The selected historical information in this section is not intended to replace these audited and unaudited financial statements.

The selected historical financial information below and the financial statements included in this prospectus do not necessarily reflect what our results of operations, financial position and cash flows would have been if we had operated our initial eight properties as a stand-alone publicly traded company during all periods presented, and, accordingly, this historical information should not be relied upon as an indicator of our future performance.

 

    Nine Months Ended
September 30,
    Year Ended December 31,  
    2013     2012     2012     2011     2010     2009     2008  
    (Unaudited)     (Unaudited)                       (Unaudited)     (Unaudited)  
    (In thousands, except share, per share and property data)  

Statement of Operations Data

             

Revenue

             

Rooms

  $ 132,852      $ 117,054      $ 160,811      $ 130,477      $ 114,940      $ 116,061      $ 140,995   

Food and beverage

    37,799        36,149        50,784        46,628        42,410        42,391        55,720   

Rental income from operating leases

    —          —          —          5,341        5,435        5,649        6,218   

Other

    7,737        6,827        9,593        9,545        10,045        10,836        13,080   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel revenue

    178,388        160,030        221,188        191,991        172,830        174,937        216,013   

Expenses

             

Hotel operating expenses:

             

Rooms

    30,183        26,666        37,001        31,429        28,625        28,079        30,397   

Food and beverage

    25,323        23,847        33,377        30,341        28,382        29,236        37,491   

Other expense

    46,599        42,396        59,013        49,949        46,205        47,350        56,177   

Management fees

    7,651        6,700        9,360        7,246        6,514        6,454        8,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel expenses

    109,756        99,609        138,751        118,965        109,726        111,119        132,140   

Property taxes, insurance and other

    8,705        7,636        10,236        9,218        10,243        11,288        11,303   

Depreciation and amortization

    22,864        22,197        29,549        29,816        31,255        34,215        35,213   

Corporate, general and administrative(1)

    9,222        7,994        10,846        9,613        7,986        6,837        6,683   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    150,547        137,436        189,382        167,612        159,210        163,459        185,339   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Nine Months Ended
September 30,
    Year Ended December 31,  
    2013     2012     2012     2011     2010     2009     2008  
    (Unaudited)     (Unaudited)                       (Unaudited)     (Unaudited)  
    (In thousands, except share, per share and property data)  

Operating income

    27,841        22,594        31,806        24,379        13,620        11,478        30,674   

Interest income

    19        19        29        24        88        78        545   

Other income

    —          —          —          9,673        —          —          —     

Interest expense and amortization of loan costs

    (24,571     (23,422     (31,244     (31,803     (31,988     (32,130     (34,753

Write-off of loan costs and exit fees

    (1,971     —          —          —          —          —          (513

Unrealized loss on derivatives

    (31     —          —          —          (28     (2     (30
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,287        (809     591        2,273        (18,308     (20,576     (4,077

Income tax expense

    (2,255     (3,287     (4,384     (2,636     (628     (611     (353
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (968     (4,096     (3,793     (363     (18,936     (21,187     (4,430

(Income) loss from consolidated entity attributable to noncontrolling interest

    575        471        (752     989        2,065        594        (1,097

(Income) loss attributable to redeemable noncontrolling interests in operating partnership

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

  $ (393   $ (3,625   $ (4,545   $ 626      $ (16,871   $ (20,593   $ (5,527
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at period end):

            (Unaudited    

Cash

  $ 14,088      $ 18,032      $ 20,313      $ 16,451      $ 14,411      $ 20,087      $ 21,379   

Investment in hotel properties, net

    765,994        774,210        771,936        789,170        808,322        819,629        834,459   

Total assets

    832,746        849,257        847,280        863,418        862,908        885,534        915,118   

Total indebtedness

    624,029        573,053        570,809        577,996        582,713        588,929        591,171   

Total liabilities

    648,599        597,768        594,902        600,376        601,369        609,302        614,720   

Total equity

    184,147        251,489        252,378        263,042        261,539        276,232        300,398   

Total liabilities and equity

    832,746        849,257        847,280        863,418        862,908        885,534        915,118   

Other Data:

             

Number of properties at period end (unaudited)

    8        8        8        8        8       

Adjusted EBITDA (unaudited)

  $ 48,328      $ 41,974      $ 56,195      $ 50,186      $ 41,517       

Hotel EBITDA(2) (unaudited)

    61,349        53,281        73,040        66,292        53,065       

AFFO (unaudited)

    22,992        16,387        22,080        17,612        10,884       

Cash flows (used in) provided by:

             

Operating activities

  $ 30,510      $ 21,725      $ 27,852      $ 15,395      $ 21,624       

Investing activities

    (17,380     (7,532     (11,944     (10,281     (22,695    

Financing activities

    (19,355     (12,612     (12,046     (3,074     (4,605    

 

(1)  Our corporate general and administrative expense following the spin-off will consist of direct general and administrative costs that we incur as well as reimbursable costs that Ashford Advisor incurs on our behalf. Without taking into account any additional growth of our company, including through acquisitions, we expect our annual corporate general and administrative costs for 2014 to range from approximately $4-5 million. We will also pay a base management fee of 0.70% times our total enterprise value to Ashford Advisor. Our total enterprise value as of December 15, 2013 was $1,115 million based on the definition of total enterprise value in the advisory agreement. As such, the annualized base management fee would be approximately $7.8 million based on that total enterprise value. We will also pay Ashford Advisor an incentive fee if our TSR exceeds the average TSR of our peer group as defined in the advisory agreement. The corporate general and administrative expense shown in this pro forma financial information includes allocated costs and expenses from Ashford Trust that we will not incur following the completion of the spin-off, as well as estimates of the base and incentive fees payable to Ashford Advisor, assuming that (i) the advisory agreement had been in effect, (ii) our company had the same TSR as Ashford Trust and (iii) our company had a total enterprise value based on a percentage of Ashford Trust’s total enterprise value, during the periods presented.
(2) We own the Hilton La Jolla Torrey Pines and The Capital Hilton in a joint venture. The Hotel EBITDA amount for these hotels represents the total amounts for each hotel, not our pro rata amount based on our ownership percentage. Also, Hotel EBITDA is calculated as if the Courtyard Philadelphia Downtown was operated as all other hotels for all periods presented, rather than as a triple-net lease through December 1, 2011.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA, Hotel EBITDA and AFFO.

 

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SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following selected unaudited pro forma combined consolidated financial information as of September 30, 2013 and for the nine months then ended and for the year ended December 31, 2012 has been derived from the unaudited pro forma financial statements appearing elsewhere in this prospectus.

The following selected unaudited pro forma combined consolidated financial information has been adjusted to give effect to the following:

 

    the historical financial results of our eight initial hotels;

 

    the contribution to us of our initial properties and capital of $145.3 million, together with liabilities secured by the initial properties of $624.0 million;

 

    the completion of the separation and distribution, including the distribution of our common stock to Ashford Trust stockholders by Ashford Trust (based on the one to five distribution ratio) and the related transfer to us from Ashford Trust of the Ashford Prime TRS entities;

 

    the issuance of 16,000 shares of our common stock to our non-employee directors upon completion of the separation and distribution;

 

    the sale of              shares of common stock in this offering at an assumed public offering price of $             per share, net of the underwriting discount and offering costs; and

 

    the exercise of the options to acquire the Pier House Resort and the Crystal Gateway Marriott, together with liabilities secured by the option properties of $186.6 million.

 

    For the Nine Months Ended September 30, 2013  
    Hotel Group
Historical
Combined
Consolidated
    Separation
Adjustments
    Pro Forma
No Options
Exercised
    Pier House
Resort
    Pro Forma
Pier House
Option

Exercised
    Crystal Gateway
Marriott
    Pro Forma
Options
Exercised
 

Revenue

             

Rooms

  $ 132,852      $ —        $ 132,852      $ 11,728      $ 144,580      $ 25,711      $ 170,291   

Food and beverage

    37,799        —          37,799        2,342        40,141        10,995        51,136   

Rental income from operating leases

    —          —          —          —          —          —          —     

Other

    7,737        —          7,737        1,076        8,813        1,914        10,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel revenue

    178,388        —          178,388        15,146        193,534        38,620        232,154   

Expenses:

             

Hotel operating expenses:

             

Rooms

    30,183        —          30,183        1,613        31,796        6,262        38,058   

Food and beverage

    25,323        —          25,323        1,830        27,153        7,508        34,661   

Other expense

    46,599        —          46,599        2,399        48,998        10,090        59,088   

Management fees

    7,651        —          7,651        630        8,105        1,158        9,263   
          (176      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel expenses

    109,756        —          109,756        6,296        116,052        25,018        141,070   

Property taxes, insurance and other

    8,705        —          8,705        3,145        11,850        2,084        13,934   

Depreciation and amortization

    22,864        —          22,864        1,385        24,350        3,309        31,191   
          101          3,532     

Transaction costs

    —          —          —          872        872        —          872   

Corporate general and administrative

    9,222        5,340        12,667        378        13,210        1,418        15,383   
      (2,059       362          1,239     
      164          (212       (509  
          15          25     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    150,547        3,445        153,992        12,342        166,334        36,116        202,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    For the Nine Months Ended September 30, 2013  
    Hotel Group
Historical
Combined
Consolidated
    Separation
Adjustments
    Pro Forma
No Options
Exercised
    Pier House
Resort
    Pro Forma
Pier House
Option

Exercised
    Crystal Gateway
Marriott
    Pro Forma
Options
Exercised
 

Operating income

    27,841        (3,445     24,396        2,804        27,200        2,504        29,704   

Interest income

    19        —          19        —          19        4        23   

Other income

    —          —          —          —          —          —          —     

Interest expense and amortization of loan costs

    (24,571     —          (24,571     (901     (27,240     (4,893     (32,133
          (1,768      

Write-off of loan costs and exit fees

    (1,971     —          (1,971     —          (1,971     —          (1,971

Unrealized loss on derivatives

    (31     —          (31     (109     (140     —          (140
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    1,287        (3,445     (2,158     26        (2,132     (2,385     (4,517

Income tax expense

    (2,255     —          (2,255     (56     (2,376     (951     (2,951
          (65       376     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (968     (3,445     (4,413     (95     (4,508     (2,960     (7,468

(Income) loss from consolidated entities attributable to noncontrolling interest

    575        —          575        —          575        —          575   

Loss attributable to redeemable noncontrolling interests in operating partnership

    —          1,355        1,355        34        1,389        1,045        2,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to the Company

  $ (393   $ (2,090   $ (2,483   $ (61   $ (2,544   $ (1,915   $ (4.459
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at period end):

             

Investment in hotel properties, net

  $ 765,994          $ 92,680        $ 232,500     

Total assets

    832,746            72,996          243,266     

Total indebtedness

    624,029            69,000          117,626     

Total liabilities

    648,599            72,996          126,117     

Total equity

    184,147            —            —       

Total liabilities and equity

    832,746            72,996          243,266     

Per Share Data:

             

Pro forma basic earnings per share

      $ (0.15     $ (0.16     $ (0.28

Pro forma diluted earnings per share

      $ (0.15     $ (0.16     $ (0.28

Pro forma weighted average shares outstanding—basic

        16,045          16,045          16,045   

Pro forma weighted average shares outstanding—diluted

        16,045          16,045          16,045   

Other Data:

             

Number of properties at period end

    8              9          10   

Adjusted EBITDA

  $ 48,328            $ 51,610        $ 60,965   

Hotel EBITDA(1)

    61,349              62,209          73,805   

AFFO

    22,992              23,308          28,234   

Cash flows (used in) provided by:

             

Operating activities

  $ 30,510               

Investing activities

    (17,380            

Financing activities

    (19,355            

 

(1) We own the Hilton La Jolla Torrey Pines and The Capital Hilton in a joint venture. The Hotel EBITDA amounts for these hotels represent the total amounts for each hotel, not our pro rata amount based on our ownership percentage. Also, Hotel EBITDA is calculated as if the Courtyard Philadelphia Downtown was operated as all other hotels for all periods presented, rather than as a triple-net lease through December 1, 2011.

 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA, Hotel EBITDA and AFFO.

 

    For the Year Ended December 31, 2012  
    Hotel Group
Combined
Consolidated
    Separation
Adjustments
    Pro Forma
No Options
Exercised
    Pier House
Resort
    Pro Forma
Pier House
Option
Exercised
    Crystal
Gateway
Marriott
    Pro Forma
Options
Exercised
 

Revenue

             

Rooms

  $ 160,811      $ —        $ 160,811      $ 14,318      $ 175,129      $ 34,750      $ 209,879   

Food and beverage

    50,784        —          50,784        2,997        53,781        14,928        68,709   

Rental income from operating leases

    —          —          —          —          —          —          —     

Other

    9,593        —          9,593        1,376        10,969        1,964        12,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel revenue

    221,188        —          221,188        18,691        239,879        51,642        291,521   

Expenses:

             

Hotel operating expenses:

             

Rooms

    37,001        —          37,001        2,102        39,103        7,892        46,995   

Food and beverage

    33,377        —          33,377        2,493        35,870        9,731        45,601   

Other expense

    59,013        —          59,013        864        59,877        13,956        73,833   

Management fees

    9,360        —          9,360        935        9,921        1,549        11,470   
          (374      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel expenses

    138,751        —          138,751        6,020        144,771        33,128        177,899   

Property taxes, insurance and other

    10,236          10,236        7,059        17,295        2,596        19,891   

Depreciation and amortization

    29,549        —          29,549        1,489        31,530        5,836        40,651   
          492          3,285     

Transaction costs

    —          —          —          —          —          —          —     

Corporate general and administrative(1)

    10,846        —          23,221        —          23,721        1,668        26,424   
      6,745          483          1,652     
      7,912          17          (647  
      275              30     
      (2,752          
      195             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    189,382        12,375        201,757        15,560        217,317        47,548        264,865   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    31,806        (12,375     19,431        3,131        22,562        4,094        26,656   

Interest income

    29        —          29        47        76        11        87   

Other income

    —          —          —          —          —          —          —     

Interest expense and amortization of loan costs

    (31,244     —          (31,244     (1,626     (34,812     (6,630     (41,442
          (1,942      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    591        (12,375     (11,784     (390     (12,174     (2,525     (14,699

Income tax expense

    (4,384     —          (4,384     (165     (4,549     (1,303     (5,268
              584     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (3,793     (12,375     (16,168     (555     (16,723     (3,244     (19,967

(Income) loss from consolidated entities attributable to noncontrolling interest

    (752     —          (752     —          (752     —          (752

(Income) loss attributable to redeemable noncontrolling interests in operating partnership

    —          5,973        5,973        196        6,169        1,145        7,314   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

  $ (4,545   $ (6,402   $ (10,947   $ (359   $ (11,306   $ (2,099   $ (13,405
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Pro forma basic earnings per share

      $ (0.68     $ (0.70     $ (0.84

Pro forma diluted earnings per share

      $ (0.68     $ (0.70     $ (0.84

Pro forma weighted average shares outstanding—basic

        16,045          16,045          16,045   

Pro forma weighted average shares outstanding—diluted

        16,045          16,045          16,045   

 

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Table of Contents
    For the Year Ended December 31, 2012  
    Hotel Group
Combined
Consolidated
    Separation
Adjustments
  Pro Forma
No Options
Exercised
  Pier House
Resort
  Pro Forma
Pier House
Option
Exercised
    Crystal
Gateway
Marriott
  Pro Forma
Options
Exercised
 

Other Data:

             

Number of properties at period end

    8              9          10   

Adjusted EBITDA

  $ 56,195            $ 55,750        $ 68,730   

Hotel EBITDA(2)

    73,040              78,570          94,542   

AFFO

    22,080              17,300          24,322   

Cash flows (used in) provided by:

             

Operating activities

  $ 27,852               

Investing activities

    (11,944            

Financing activities

    (12,046            

 

(1)  Our corporate general and administrative expense following the spin-off will consist of direct general and administrative costs that we incur as well as reimbursable costs that Ashford Advisor incurs on our behalf. Without taking into account any additional growth of our company, including through acquisitions, we expect our annual corporate general and administrative costs for 2014 to range from approximately $4-5 million. We will also pay a base management fee of 0.70% times our total enterprise value to Ashford Advisor. Our total enterprise value as of December 15, 2013 was $1,115 million based on the definition of total enterprise value in the Advisory Agreement. As such, the annualized base management fee would be approximately $7.8 million based on that total enterprise value. We will also pay Ashford Advisor an incentive fee if our TSR exceeds the average TSR of our peer group as defined in the advisory agreement. The corporate general and administrative expense shown in this pro forma financial information includes allocated costs and expenses from Ashford Trust that we will not incur following the completion of the spin-off, as well as estimates of the base and incentive fees payable to Ashford Advisor, assuming that (i) the advisory agreement had been in effect, (ii) our company had the same TSR as Ashford Trust and (iii) our company had a total enterprise value based on a percentage of Ashford Trust’s total enterprise value, during the periods presented.
(2) We own the Hilton La Jolla Torrey Pines and The Capital Hilton in a joint venture. The Hotel EBITDA amounts for these hotels represent the total amounts for each hotel, not our pro rata amount based on our ownership percentage. Also, Hotel EBITDA is calculated as if the Courtyard Philadelphia Downtown was operated as all other hotels for all periods presented, rather than as a triple-net lease through December 1, 2011.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with the financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward looking statements based upon current expectations that involve numerous risks and uncertainties. Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under “Risk Factors” or elsewhere in this prospectus. See “Risk Factors” and “Cautionary Statement Regarding Forward Looking Statements.”

In this section, unless the context otherwise requires, references to “we,” “us” and “our” refer to the eight selected properties for which we have provided financial information in this prospectus.

Overview

Ashford Prime is a newly formed, externally-advised Maryland corporation that invests primarily in high RevPAR, luxury, upper-upscale and upscale hotels. As of December 18, 2013, we owned interests in eight hotels in five states and the District of Columbia with 3,146 total rooms. The hotels in our initial portfolio are located in U.S. gateway markets with favorable growth characteristics resulting from multiple demand generators and limited risk of additional supply. Our initial portfolio generated RevPAR of $153.50 for the nine months ended September 30, 2013, which is 218% of the average of the U.S. lodging industry, according to Smith Travel Research, Inc.

Ashford Trust, an NYSE-listed REIT focused on investing opportunistically across all segments and at all levels of the capital structure within the hospitality industry, contributed our initial assets to us. We became a public company on November 19, 2013, when Ashford Trust completed the spin-off of our company through the distribution of our outstanding common stock to the Ashford Trust stockholders. Ashford Advisor, a subsidiary of Ashford Trust, is our external advisor. All of the hotels in our initial portfolio are currently asset-managed by Ashford Advisor. As of December 18, 2013, Ashford Trust beneficially owned common units of our operating partnership, Ashford Prime OP, representing 20% of our company on a fully-diluted basis.

We believe that the current market environment presents attractive opportunities for us to acquire additional hotels that are compatible with our investment strategy. We also believe that current lodging market fundamentals present favorable opportunities for RevPAR and EBITDA growth at our eight initial hotels.

We intend to elect to be treated as a REIT for federal income tax purposes, and we intend to conduct our business and own substantially all of our assets through our operating partnership.

We own six of our initial hotel properties directly, and the remaining two hotel properties through a majority-owned investment in an entity, which represents 3,146 total rooms, or 2,912 net rooms excluding those attributable to our partner. Currently, all of our hotel properties are located in the United States.

Discussion of Presentation

The discussion below relates to the financial condition and results of operation of the eight initial properties contributed to us by Ashford Trust as if they were owned by an entity separate from Ashford Trust during the periods presented. These combined consolidated historical financial statements have been prepared on a “carve-out” basis from Ashford Trust’s consolidated financial statements using the historical results of operations, cash flows, assets and liabilities attributable to our eight initial properties and include allocations of income, expenses, assets and liabilities from Ashford Trust. These allocations reflect significant assumptions, and the financial statements do not fully reflect what our financial positions, results of operations and cash flows would have been had we been a stand-alone publicly traded company owning the eight initial properties during all periods presented. As a result, historical financial information is not necessarily indicative of our future results of operations, financial positions and cash flows.

 

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As an example of allocations relating to the “carve out” presentation, we note that corporate general and administrative expense and certain indirect costs have been allocated. Corporate general and administrative expense represents an allocation of certain Ashford Trust corporate general and administrative costs including salaries and benefits, stock based compensation, legal and professional fees, rent expense and office expenses. Any expenses that were determined to be directly related to any hotel property or specific transaction were allocated directly to the related hotel. However, any indirect costs were allocated pro rata across all hotels owned by Ashford Trust, including the eight initial properties contributed to us, based on the gross investment value for all such hotels. Indirect costs are primarily attributable to certain ownership costs related to specific hotel properties but paid by Ashford Trust. Indirect costs are included in “Other expenses” in the combined consolidated financial statements. Additionally, interest income reflects earnings on amounts held as reserves by lenders and property managers.

Key Indicators of Operating Performance

We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel’s contribution to cash flow and its potential to provide attractive long-term total returns. These key indicators include:

 

    Occupancy—Occupancy means the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occupancy measures the utilization of our hotels’ available capacity. We use occupancy to measure demand at a specific hotel or group of hotels in a given period.

 

    ADR—ADR means average daily rate and is calculated by dividing total hotel rooms revenues by total number of rooms sold in a given period. ADR measures average room price attained by a hotel and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. We use ADR to assess the pricing levels that we are able to generate.

 

    RevPAR—RevPAR means revenue per available room and is calculated by multiplying ADR by the average daily occupancy. RevPAR is one of the commonly used measures within the hotel industry to evaluate hotel operations. RevPAR does not include revenues from food and beverage sales or parking, telephone or other non-rooms revenues generated by the property. Although RevPAR does not include these ancillary revenues, it is generally considered the leading indicator of core revenues for many hotels. We also use RevPAR to compare the results of our hotels between periods and to analyze results of our comparable hotels (comparable hotels represent hotels we have owned for the entire period).

RevPAR changes that are primarily driven by changes in occupancy have different implications for overall revenues and profitability than changes that are driven primarily by changes in ADR. For example, an increase in occupancy at a hotel would lead to additional variable operating costs (including housekeeping services, utilities and room supplies) and could also result in increased other operating department revenue and expense. Changes in ADR typically have a greater impact on operating margins and profitability as they do not have a substantial effect on variable operating costs.

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only rooms revenue. Rooms revenue comprised approximately 74% of our total revenue for the nine months ended September 30, 2013 and is dictated by demand (as measured by occupancy), pricing (as measured by ADR) and our available supply of hotel rooms.

 

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Another commonly used measure in the lodging industry is the RevPAR penetration index, which measures a hotel’s RevPAR in relation to the average RevPAR of that hotel’s competitive set. We use the RevPAR penetration index as an indicator of a hotel’s market share in relation to its competitive set. However, the RevPAR penetration index for a particular hotel is not necessarily reflective of that hotel’s relative share of any particular lodging market, and instead provides the relative revenue per room generated by each such property as compared to the competitive set. The RevPAR penetration index for a particular hotel is calculated as the quotient of (1) the subject hotel’s RevPAR divided by (2) the average RevPAR of the hotels in the subject hotel’s competitive set including the subject hotel, multiplied by 100. For example, if a hotel’s RevPAR is $150 and the average RevPAR of the hotels in its competitive set is $150 including our hotel, the RevPAR penetration index would be 100, which would indicate that the subject hotel is capturing its fair market share in relation to its competitive set (i.e., the hotel’s RevPAR is, on average, the same as its competitors). If, however, a hotel’s RevPAR is $175 and the average RevPAR of the hotels in its competitive set is $150, the RevPAR penetration index of the subject hotel would be 116.7, which would indicate that the subject hotel maintains a RevPAR premium of approximately 16.7% (and, therefore, a market share premium) in relation to its competitive set. RevPAR data, other than the RevPAR of our eight initial hotels, used in calculating RevPAR penetration indices in this prospectus was provided by Smith Travel Research.

One critical component in this calculation is the determination of a hotel’s competitive set, which consists of a small group of hotels in the relevant market that we and the hotel management company that manages the hotel believe are comparable for purposes of benchmarking the performance of such hotel. A hotel’s competitive set is mutually agreed upon by us and the hotel’s management company. Factors that we consider when establishing a competitive set include geographic proximity, brand affiliations and rate structure, as well as the level of service provided at the hotel. Competitive set determinations are highly subjective, however, and our methodology for determining a hotel’s competitive set may differ materially from those used by other hotel owners and/or management companies.

For the nine months ended September 30, 2013, the portfolio wide RevPAR penetration index of our initial hotels was 111.0, which indicates that, on average, our initial hotels maintained a market share premium of approximately 111% in relation to its competitive set.

We also use FFO, AFFO, EBITDA, Adjusted EBITDA and Hotel EBITDA as measures of the operating performance of our business. See “—Non-GAAP Financial Measures.”

Principal Factors Affecting Our Results of Operations and Hotel EBITDA

The principal factors affecting our operating results include overall demand for hotel rooms compared to the supply of available hotel rooms, and the ability of our third-party management companies to increase or maintain revenues while controlling expenses.

Demand. The demand for lodging, including business travel, is directly correlated to the overall economy; as GDP increases, lodging demand increases. Historically, periods of declining demand are followed by extended periods of relatively strong demand, which typically occurs during the growth phase of the lodging cycle.

Following the recession that commenced in 2008, the lodging industry has experienced improvement in fundamentals, including demand, which has continued into 2013. We believe improvements in the economy will continue to benefit the lodging industry and hotel operating results for several years to come.

Supply. The development of new hotels is driven largely by construction costs, the availability of financing and expected performance of existing hotels.

 

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In its December 2013—January 2014 edition of Hotel Horizons, PKF Hospitality Research, LLC projected the following growth in room demand, RevPAR and supply through 2016:

 

Year

   Room
Demand
Growth
    RevPAR
Growth
    Supply
Growth
 

2013

     2.1     5.2     0.8

2014

     3.0     6.6     1.2

2015

     3.3     7.5     1.4

2016

     1.6     4.8     1.9
  

 

 

   

 

 

   

 

 

 

Compound Annual Growth Rate

     2.5     6.0     1.3

We expect that our ADR, occupancy and RevPAR performance will be impacted by macroeconomic factors such as national and local employment growth, personal income and corporate earnings, GDP, consumer confidence, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel construction, the pricing strategies of competitors and currency fluctuations. In addition, our ADR, occupancy and RevPAR performance are dependent on the continued success of the Marriott and Hilton brands.

Revenue. Substantially all of our revenue is derived from the operation of hotels. Specifically, our revenue is comprised of:

 

    Rooms revenue—Occupancy and ADR are the major drivers of rooms revenue. Rooms revenue accounts for the substantial majority of our total revenue.

 

    Food and beverage revenue—Occupancy and the type of customer staying at the hotel are the major drivers of food and beverage revenue (i.e., group business typically generates more food and beverage business through catering functions when compared to transient business, which may or may not utilize the hotel’s food and beverage outlets or meeting and banquet facilities).

 

    Other hotel revenue—Occupancy and the nature of the property are the main drivers of other ancillary revenue, such as telecommunications, parking and leasing services.

Hotel Operating Expenses. The following presents the components of our hotel operating expenses:

 

    Rooms expense—These costs include housekeeping wages and payroll taxes, reservation systems, room supplies, laundry services and front desk costs. Like rooms revenue, occupancy is the major driver of rooms expense and, therefore, rooms expense has a significant correlation to rooms revenue. These costs can increase based on increases in salaries and wages, as well as the level of service and amenities that are provided.

 

    Food and beverage expense—These expenses primarily include food, beverage and labor costs. Occupancy and the type of customer staying at the hotel (i.e., catered functions generally are more profitable than restaurant, bar or other on-property food and beverage outlets) are the major drivers of food and beverage expense, which correlates closely with food and beverage revenue.

 

    Management fees—Base management fees are computed as a percentage of gross revenue. Incentive management fees generally are paid when operating profits exceed certain threshold levels. See “Certain Agreements—Hotel Management Agreements.”

 

    Other hotel expenses—These expenses include labor and other costs associated with the other operating department revenues, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs.

Most categories of variable operating expenses, including labor costs such as housekeeping, fluctuate with changes in occupancy. Increases in occupancy are accompanied by increases in most categories of variable operating expenses, while increases in ADR typically only result in increases in limited categories of operating

 

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costs and expenses, such as franchise fees, management fees and credit card processing fee expenses which are based on hotel revenues. Thus, changes in ADR have a more significant impact on operating margins than changes in occupancy.

Critical Accounting Policies

Our accounting policies are fully described in Note 2 of Notes to The Ashford Hospitality Prime Hotels Combined Consolidated Financial Statements included in this prospectus. We believe that the following discussion addresses our most critical accounting policies, representing those policies considered most vital to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, and complex judgments.

Management Agreements. We have assumed certain management agreements that were first assumed by Ashford Trust when Ashford Trust acquired our initial hotel properties. Based on a review of these management agreements, Ashford Trust concluded that certain terms of these management agreements were more favorable to the respective managers than typical current market management agreements at the time of the acquisition. As a result, Ashford Trust recorded unfavorable contract liabilities related to these management agreements of $1.5 million as of the respective acquisition dates based on the present value of expected cash outflows over the initial terms of the related agreements. At September 30, 2013, $514,000 of unfavorable contract liabilities remained related to a hotel management agreement. Such unfavorable contract liabilities are being amortized as non-cash reductions to incentive management fees on a straight-line basis over the initial terms of the related agreements.

Income Taxes. At September 30, 2013, we had deferred tax assets in excess of deferred tax liabilities of $2.7 million. Management determined that it is more likely than not that our net deferred tax asset will not be realized, resulting in a valuation allowance of $2.7 million. We evaluate the realizability of our deferred tax assets by assessing our valuation allowance and adjusting the amount of such allowance, if necessary. In evaluating our ability to realize our deferred tax assets, we consider all available positive and negative evidence, including historical results of operations, projected future taxable income, and scheduled reversals of deferred tax liabilities. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). At September 30, 2013, we had net operating loss carry forwards for federal income tax purposes of $3.9 million, which are attributable to the subsidiaries conveyed to us in the separation, and which begin to expire in 2023. The loss carry forwards may be available to offset future taxable income, if any, through 2023; however, there could be substantial limitations on their use imposed by the Code. Accordingly, the deferred tax assets related to these loss carry forwards have been fully reserved against.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that clarified the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. The guidance prescribes a financial statement recognition and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We classify interest and penalties related to underpayment of income taxes as income tax expense. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and cities. Tax years 2009 through 2012 remain subject to potential examination by certain federal and state taxing authorities. Income tax examinations of certain of our taxable corporate subsidiaries are currently in process; see Note 10 of the unaudited interim Notes to Condensed Combined Consolidated Financial Statements as of September 30, 2013 included in this prospectus. Accordingly, we believe that the results of the completion of these examinations will not have a material adverse effect on our financial condition or results of operations.

Investment in Hotel Properties. Hotel properties are generally stated at cost. For hotel properties owned through our majority-owned entities, the carrying basis attributable to the partners’ minority ownership is recorded at historical cost, net of any impairment charges, while the carrying basis attributable to our majority

 

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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 the hotel properties are capitalized.

Impairment of Investment 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, less cost to sell. In evaluating the 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 undiscounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. If an asset is deemed to be impaired, we record an impairment charge for the amount that the property’s net book value exceeds its estimated fair value, or fair value less cost to sell. During the nine months ended September 30, 2013 and the years ended December 31, 2012, 2011 and 2010, we have not recorded any impairment charges.

Depreciation and Amortization Expense. Depreciation expense is based on the estimated useful life of the assets, while amortization expense for leasehold improvements is based on the shorter of the lease term or the estimated useful life of the related assets. Presently, hotel properties are depreciated using the straight-line method over lives which range from 7.5 to 39 years for buildings and improvements and three to five years for furniture, fixtures, and equipment. While we believe our estimates are reasonable, a change in estimated lives could affect depreciation expense and net income (loss) as well as resulting gains or losses on potential hotel sales.

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. Rental income represents income from leasing hotel properties to third-party tenants on triple-net operating leases. Base rent on the triple-net lease is recognized on a straight-line basis over the lease terms and variable rent is recognized when earned. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.

Share-Based Compensation. We have two equity incentive plans that provide for the grant of restricted or unrestricted shares of our common stock, options to purchase our common stock and share awards (including restricted shares and restricted share units), share appreciation rights, performance shares, performance units and other equity-based awards, including LTIP units, or any combination of the foregoing. Equity-based compensation is recognized as an expense in the financial statements over the vesting period and measured at the fair value of the award on the date of grant. The amount of the expense may be subject to adjustment in future periods depending on the specific characteristics of the equity-based award and the application of the accounting guidance.

Results of Operations

Marriott currently manages six of our properties. For these Marriott-managed hotels, through fiscal 2012, the fiscal year reflects 12 weeks of operations for each of the first three quarters of the year and 16 weeks for the fourth quarter of the year. Beginning in 2013, the fiscal quarters end on March 31, June 30, September 30 and December 31. Therefore, in any given period, period-over-period results will have different ending dates. For Marriott-managed hotels, the 2013 and 2012 fiscal years began on December 29, 2012 and December 31, 2011, respectively. The 2013 and 2012 fiscal periods ended September 30, 2013 and September 7, 2012, respectively, and contained 276 days and 252 days, respectively. Prior results have not been adjusted.

 

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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

The following table summarizes the changes in key line items from our combined consolidated statements of operations for the nine months ended September 30, 2013 and 2012 (in thousands):

 

     Nine Months Ended September 30,               
           2013                    2012            $ Change     % Change  

Revenue

            

Rooms

   $ 132,852         $ 117,054       $ 15,798        13.5

Food and beverage

     37,799           36,149         1,650        4.6

Other

     7,737           6,827         910        13.3
  

 

 

      

 

 

    

 

 

   

 

 

 

Total hotel revenue

     178,388           160,030         18,358        11.5

Expenses

            

Hotel operating expenses:

            

Rooms

     30,183           26,666         3,517        13.2

Food and beverage

     25,323           23,847         1,476        6.2

Other expenses

     46,599           42,396         4,203        9.9

Management fees

     7,651           6,700         951        14.2
  

 

 

      

 

 

    

 

 

   

 

 

 

Total hotel expenses

     109,756           99,609         10,147        10.2

Property taxes, insurance and other

     8,705           7,636         1,069        14.0

Depreciation and amortization

     22,864           22,197         667        3.0

Corporate, general and administrative

     9,222           7,994         1,228        15.4
  

 

 

      

 

 

    

 

 

   

 

 

 

Total expenses

     150,547           137,436         13,111        9.5
  

 

 

      

 

 

    

 

 

   

 

 

 

Operating income

     27,841           22,594         5,247        23.2

Interest income

     19           19         —         
 
—  
 
  

Interest expense and amortization of loan costs

     (24,571        (23,422      (1,149     4.9

Write-off of loan costs and exit fees

     (1,971        —           (1,971  

Unrealized loss on derivatives

     (31        —           (31  
  

 

 

      

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     1,287           (809      2,096        259.1

Income tax expense

     (2,255        (3,287      1,032        (31.4 )% 
  

 

 

      

 

 

    

 

 

   

 

 

 

Net loss

     (968        (4,096      3,128        (76.4 )% 

Loss from consolidated entity attributable to noncontrolling interests

     575           471         104        22.1
  

 

 

      

 

 

    

 

 

   

 

 

 

Net loss attributable to the Company

   $ (393      $ (3,625    $ 3,232        89.2
  

 

 

      

 

 

    

 

 

   

 

 

 

Net income (loss) represents the operating results of eight hotel properties for the nine months ended September 30, 2013 and 2012.

The following table illustrates the key performance indicators of these hotels:

 

     Nine Months Ended September 30,  
             2013                     2012          

Occupancy

     80.39     79.05

ADR (average daily rate)

   $ 190.94      $ 182.04   

RevPAR (revenue per available room)

   $ 153.50      $ 143.90   

Room revenue (in thousands)

   $ 132,852      $ 117,054   

Total hotel revenue (in thousands)

   $ 178,388      $ 160,030   

 

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Rooms Revenue. Rooms revenue from our hotels increased $15.8 million, or 13.5%, during the nine months ended September 30, 2013 (the “2013 period”) compared to the nine months ended September 30, 2012 (the “2012 period”). During the 2013 period, we experienced a 134 basis point increase in occupancy and a 4.9% increase in room rates as the economy continued to improve. Rooms revenue at The Capital Hilton increased $857,000 which was primarily attributable to the presidential inauguration in the 2013 period. Rooms revenue increased $17,000 at the Hilton La Jolla Torrey Pines. Rooms revenue at the Hilton La Jolla Torrey Pines has improved since the completion of a major renovation earlier in the 2013 period. Additionally, our six Marriott-managed hotels had 24 additional days in the 2013 period when compared to the 2012 period.

Food and Beverage Revenue. Food and beverage revenues from our hotels increased $1.7 million, or 4.6%, to $37.8 million during the 2013 period. This increase is primarily attributable to our six Marriott-managed hotels having 24 additional days in the 2013 period when compared to the 2012 period, offset by lower food and beverage revenue at The Capital Hilton and the Hilton La Jolla Torrey Pines. The Capital Hilton has been negatively affected by the sequestration and the Hilton La Jolla Torrey Pines was negatively affected as a result of a major renovation.

Other Revenue. Other hotel revenue, which consists mainly of telecommunications, parking and rentals, experienced an increase of $910,000 primarily attributable to our six Marriott-managed hotels that had 24 additional days in the 2013 period when compared to the 2012 period.

Rooms Expense. Rooms expense increased $3.5 million, or 13.2%, to $30.2 million in the 2013 period. Rooms margin was 77.3% for the nine months ended September 30, 2013 compared to 77.2% for the nine months ended September 30, 2012. The increase is attributable to higher rooms revenue as well as the 24 additional days during the 2013 period for our Marriott-managed hotels.

Food and Beverage Expense. Food and beverage expense increased $1.5 million, or 6.2%, to $25.3 million during the 2013 period. The increase is attributable to increased food and beverage revenue resulting from the 24 additional days during the 2013 period for our Marriott-managed hotels offset by lower food and beverage expense at The Capital Hilton and the Hilton La Jolla Torrey Pines.

Other Operating Expenses. Other expense increased $4.2 million, or 9.9%, to $46.6 million in the 2013 period. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced an increase of $156,000 in direct expenses and an increase of $4.0 million in indirect expenses and incentive management fees in the 2013 period. The increase in indirect expenses is primarily attributable to higher general and administrative costs, increased repairs and maintenance and higher incentive management fees. The direct expenses were 1.8% of total hotel revenue for the 2013 period and 1.9% for the 2012 period.

Management Fees. Base management fees increased $951,000, or 14.2%, to $7.7 million in the 2013 period as a result of higher hotel revenue in the 2013 period.

Property Taxes, Insurance and Other. Property taxes, insurance and other increased $1.1 million for the 2013 period to $8.7 million. The increase is primarily due to higher property taxes at one hotel property as a result of a higher assessed value in the 2013 period.

Depreciation and Amortization. Depreciation and amortization increased $667,000 for the 2013 period compared to the 2012 period due to a major renovation at the Hilton La Jolla Torrey Pines during 2012 and early 2013.

Corporate General and Administrative. Corporate general and administrative expenses increased to $9.2 million in the 2013 period compared to $8.0 million in the 2012 period primarily due to additional expense associated with accelerated vestings of LTIP units of Ashford Trust’s chairman emeritus as a result of his retirement and new role.

 

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Interest Income. Interest income was $19,000 for both the 2013 and 2012 periods.

Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs increased $1.2 million to $24.6 million for the 2013 period from $23.4 million for the 2012 period as a result of a higher loan balance and a higher weighted average interest rate as a result of the refinance of our $141.7 million loan. The average LIBOR rates for the 2013 period and the 2012 period were 0.19% and 0.24%, respectively.

Write-off of Loan Costs and Exit Fees. In the 2013 period, we refinanced our $141.7 million mortgage loan due August 2013, with an outstanding balance of $141.0 million, with a $199.9 million mortgage loan due February 2018. As a result, we wrote-off unamortized loan costs of $472,000 and incurred additional loan costs of $1.5 million. In the 2012 period, we did not incur any write-offs of loan costs.

Unrealized Loss on Derivatives. We recorded an unrealized loss on derivatives of $31,000 for the 2013 period. The unrealized loss for the 2013 period is an unrealized loss on an interest rate cap entered into in conjunction with our $199.9 million mortgage loan. No unrealized gain or loss was recorded in the 2012 period. The fair value of the interest rate cap is primarily based on movements in the LIBOR forward curve and the passage of time.

Income Tax Expense. We recorded income tax expense of $2.3 million and $3.3 million for the 2013 period and the 2012 period, respectively. The decrease in tax expense in the 2013 period is primarily due to lower profitability in our taxable corporate subsidiaries resulting from an increase in certain indirect expenses.

Loss from Consolidated Entity Attributable to Noncontrolling Interests. The noncontrolling interest partner in a consolidated entity was allocated losses of $575,000 and $471,000 for the 2013 period and the 2012 period, respectively. At September 30, 2013, noncontrolling interests in consolidated entities represented an ownership interest of 25% in two hotel properties held by one entity.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

     Year Ended December 31,               
     2012      2011      $ Change     % Change  

Revenue

          

Rooms

   $ 160,811       $ 130,477       $ 30,334        23.2

Food and beverage

     50,784         46,628         4,156        8.9

Rental income from operating leases

     —           5,341         (5,341     (100.0 %) 

Other

     9,593         9,545         48        0.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Total hotel revenue

     221,188         191,991         29,197        15.2

Expenses

          

Hotel operating expenses:

          

Rooms

     37,001         31,429         5,572        17.7

Food and beverage

     33,377         30,341         3,036        10.0

Other expenses

     59,013         49,949         9,064        18.1

Management fees

     9,360         7,246         2,114        29.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total hotel expenses

     138,751         118,965         19,786        16.6

Property taxes, insurance and other

     10,236         9,218         1,018        11.0

Depreciation and amortization

     29,549         29,816         (267     (0.9 %) 

Corporate, general and administrative

     10,846         9,613         1,233        12.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total expenses

     189,382         167,612         21,770        13.0
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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     Year Ended
December 31,
             
     2012     2011     $ Change     % Change  

Operating income

     31,806        24,379        7,427        30.5

Interest income

     29        24        5        20.8

Other income

     —          9,673        (9,673     (100.0 %) 

Interest expense and amortization of loan costs

     (31,244     (31,803     559        (1.8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     591        2,273        (1,682     (74.0 %) 

Income tax expense

     (4,384     (2,636     (1,748     66.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,793     (363     (3,430     944.9

(Income) loss from consolidated entities attributable to noncontrolling interests

     (752     989        (1,741     (176.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ (4,545   $ 626      $ (5,171     (826.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss represents the operating results of eight hotel properties for the years ended December 31, 2012 and 2011. We began consolidating the operations of the Courtyard Philadelphia Downtown in Philadelphia, PA (“Courtyard Philadelphia Downtown”) on December 2, 2011. This hotel previously was under a triple-net operating lease for which we only recorded rental income through December 1, 2011. The following table illustrates the key performance indicators of our hotels for the periods indicated:

 

     Year Ended December 31,  
     2012     2011  

Occupancy

     77.40     75.90

ADR (average daily rate)

   $ 181.13      $ 175.64   

RevPAR (revenue per available room)

   $ 140.20      $ 133.31   

Room revenue (in thousands)

   $ 160,811      $ 130,477   

Total hotel revenue (in thousands)

   $ 221,188      $ 191,991   

Rooms Revenue. Rooms revenue for the year ended December 31, 2012 (“2012”) increased $30.3 million, or 23.2%, to $160.8 million from $130.5 million for the year ended December 31, 2011 (“2011”). During 2012, we experienced a 150 basis point increase in occupancy and a 3.1% increase in room rates as the economy continued to improve. Rooms revenue increased $21.7 million as a result of the related assignment to us of the remaining 11% ownership interest in an entity which previously held the Courtyard Philadelphia Downtown under a triple-net lease until December 2011. Rooms revenue increased $1.8 million at the Seattle Marriott Waterfront as a result of the hotel being under renovation in 2011. These increases were offset by lower rooms revenue at The Capital Hilton during the fourth quarter of 2012 due to the U.S. federal government cutbacks and Hurricane Sandy.

Food and Beverage Revenue. Food and beverage revenue experienced an increase of $4.2 million, or 8.9%, to $50.8 million in 2012. Food and beverage revenue increased $3.8 million as a result of consolidating the Courtyard Philadelphia Downtown.

Rental Income from Operating Leases. Rental income from the triple-net operating lease decreased $5.3 million in 2012 as a result of consolidating the Courtyard Philadelphia Downtown.

Other Revenue. Other hotel revenue, which consists mainly of telecommunications, parking and rent, experienced a slight increase of $48,000 during 2012.

Rooms Expense. Rooms expense increased $5.6 million or 17.7%, to $37.0 million in 2012. Rooms expense increased $4.6 million as a result of consolidating the Courtyard Philadelphia Downtown. Rooms margin increased 110 basis points from 75.9% to 77.0%.

 

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Food and Beverage Expense. Food and beverage expense increased $3.0 million, or 10.0%, to $33.4 million during 2012. Food and beverage expense increased $2.3 million as a result of consolidating the Courtyard Philadelphia Downtown.

Other Operating Expense. Other expense increased $9.1 million, or 18.1%, to $59.0 million in 2012. Hotel operating expenses consist of direct expenses from departments associated with revenue streams and indirect expenses associated with support departments and incentive management fees. We experienced increases of $171,000 in direct expenses and $8.9 million in indirect expenses. Of those amounts, increases in direct expenses of $98,000 and increases in indirect expenses of $7.3 million were attributable to consolidating the Courtyard Philadelphia Downtown. Direct expenses were 1.8% and 2.0% of total hotel revenue for 2012 and 2011, respectively.

Management Fees. Base management fees increased $2.1 million, or 29.2%, to $9.4 million in 2012. Base management fees increased $1.7 million as a result of consolidating the Courtyard Philadelphia Downtown. The remaining increase is attributable to higher hotel revenue.

Property Taxes, Insurance, and Other. Property taxes, insurance, and other increased $1.0 million during 2012 to $10.2 million. The increase is primarily due to a $1.3 million increase in property taxes resulting from refunds and reductions in 2011 related to successful appeals and increased property value assessments related to certain hotels in 2012, partially offset by decreased insurance expense of $241,000 resulting from lower premiums for insurance policies and a reduction in deductibles for losses of $33,000.

Depreciation and Amortization. Depreciation and amortization decreased $267,000 for 2012, compared to 2011, primarily due to a decrease in depreciation for certain assets that became fully depreciated during 2012.

Corporate General and Administrative. Corporate general and administrative expenses increased $1.2 million to $10.8 million for 2012 compared to $9.6 million for 2011. This increase was primarily attributable to stock based compensation related to LTIP grants.

Interest Income. Interest income was $29,000 and $24,000 for 2012 and 2011, respectively.

Other Income. Through December 1, 2011, the Courtyard Philadelphia Downtown was held by an entity in which we had an ownership interest of 89% and was leased on a triple-net lease basis to a third-party tenant. Effective December 2, 2011, we obtained the remaining 11% ownership interest from our partner as a result of a dispute resolution. The triple-net lease agreement was canceled and the operating results of the Courtyard Philadelphia Downtown have been included in our combined consolidated statements of operations since December 2, 2011. We recognized a gain of $9.7 million for this transaction, consisting of the assignment of an $8.1 million note receivable and an agreement to retain $1.6 million of security deposits that were originally refundable.

Interest Expense and Amortization of Loan Costs. Interest expense and amortization of loan costs decreased $559,000 to $31.2 million for 2012 from $31.8 million for 2011. The decrease is primarily due to lower loan balances in 2012 compared to 2011. The average LIBOR rates for 2012 and 2011 were 0.24% and 0.23%, respectively.

Income Tax Expense. We recorded income tax expense of $4.4 million and $2.6 million for 2012 and 2011, respectively. The increase in income tax expense in 2012 is primarily due to increased profitability in our taxable corporate subsidiaries.

(Income) Loss from Consolidated Entities Attributable to Noncontrolling Interests. Noncontrolling interest partners in consolidated entities were allocated income of $752,000 in 2012 and a loss of $989,000 during 2011. At December 31, 2012, noncontrolling interests in a consolidated entity represented an ownership interest of 25% in two hotel properties held by one entity.

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

The following table summarizes the changes in key line items from our combined consolidated statements of operations for the years ended December 31, 2011 and 2010 (in thousands):

 

     Year Ended December 31,              
     2011     2010     $ Change     % Change  

Revenue

        

Rooms

   $ 130,477      $ 114,940      $ 15,537        13.5

Food and beverage

     46,628        42,410        4,218        9.9

Rental income from operating leases

     5,341        5,435        (94     (1.7 %) 

Other

     9,545        10,045        (500     (5.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel revenue

     191,991        172,830        19,161        11.1

Expenses

        

Hotel operating expenses:

        

Rooms

     31,429        28,625        2,804        9.8

Food and beverage

     30,341        28,382        1,959        6.9

Other expenses

     49,949        46,205        3,744        8.1

Management fees

     7,246        6,514        732        11.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel expenses

     118,965        109,726        9,239        8.4

Property taxes, insurance and other

     9,218        10,243        (1,025     (10.0 %) 

Depreciation and amortization

     29,816        31,255        (1,439     (4.6 %) 

Corporate, general and administrative

     9,613        7,986        1,627        20.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     167,612        159,210        8,402        5.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     24,379        13,620        10,759        79.0

Interest income

     24        88        (64     (72.7 %) 

Other income

     9,673              9,673         

Interest expense and amortization of loan costs

     (31,803     (31,988     185        (0.6 %) 

Unrealized loss on derivatives

           (28     28        (100.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,273        (18,308     20,581        (112.4 %) 

Income tax expense

     (2,636     (628     (2,008     319.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (363     (18,936     18,573        (98.1 %) 

Loss from consolidated joint ventures attributable to noncontrolling interests

     989        2,065        (1,076     (52.1 %)