NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at December 31, 2013 and December 31, 2012:



		December 31, 2013		December 31, 2012

Land	$	339,027	$	305,286
Buildings and Improvements		1,222,639		1,214,865
Furniture, Fixtures and Equipment		171,116		171,892
Construction in Progress		63,168		40,572
		1,795,950		1,732,615

Less Accumulated Depreciation		(260,115)		(265,902)

Total Investment in Hotel Properties	$	1,535,835	$	1,466,713

Depreciation expense was $61,500, $55,956 and $55,336 (including depreciation on assets held for sale) for the years ended December 31, 2013, 2012, and 2011, respectively.

During the year ended December 31, 2013, we acquired the following wholly-owned hotel properties:



Hotel	Acquisition Date		Land		Buildings and Improvements		Furniture Fixtures and Equipment		Franchise Fees and Loan Costs		Total Purchase Price
Hyatt Union Square, New York, NY*	4/9/2013	$	32,940	$	79,300	$	9,760	$	1,945	$	123,945
Courtyard by Marriott, San Diego, CA	5/30/2013		15,656		51,674		3,671		183		71,184
Residence Inn, Coconut Grove, FL	6/12/2013		4,146		17,456		218		75		21,895
Blue Moon, Miami Beach, FL	12/20/2013		4,874		20,354		1,125		-		26,353
Winter Haven, Miami Beach, FL	12/20/2013		5,400		18,147		1,050		-		24,597

Total		$	63,016	$	186,931	$	15,824	$	2,203	$	267,974

*On April 9, 2013, we completed the acquisition of the Hyatt Union Square hotel in New York, NY from Risingsam Union Square LLC. Consideration given in exchange for the property included $36,000 paid in cash to the seller and our cancellation of a development loan receivable in the original principal amount of $10,000 and $3,303 of accrued interest on the loan. In addition, we paid off the existing construction financing and entered into a new mortgage loan of $55,000. We recognized a net gain of approximately $12,108 on the purchase of the Hyatt Union Square hotel as the fair value of the assets acquired less any liabilities assumed exceeded the consideration transferred.

During the year ended December 31, 2013, we paid $855 in acquisition costs related to the above acquired assets.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

As shown in the table below, included in the consolidated statements of operations for the year ended December 31, 2013 are total revenues of $22,889 and a total net income of $1,412 for hotels we have acquired and consolidated since the date of acquisition. These amounts represent the results of operations for these hotels since the date of acquisition:



	Year Ended December 31,
	2013
Hotel		Revenue		Net (Loss) Income
Hyatt Union Square, New York, NY	$	11,272	$	(1,466)
Courtyard by Marriott, San Diego, CA		8,350		1,914
Residence Inn, Coconut Grove, FL		2,889		713
Blue Moon, Miami Beach, FL		175		111
Winter Haven, Miami Beach, FL		203		140

Total	$	22,889	$	1,412

During the year ended December 31, 2012, we acquired the following wholly-owned hotel and hotel development properties:


Hotel	Acquisition Date	Land		Buildings and Improvements		Furniture Fixtures and Equipment		Franchise Fees and Loan Costs		Leasehold Liability		Total Purchase Price
The Rittenhouse Hotel, Philadelphia, PA	3/1/2012	$	7,119	$	29,605	$	3,580	$	2,156	$	(827)	$	42,460
The Boxer, Boston, MA	5/7/2012		1,456		14,954		1,790		-		-		18,200
Holiday Inn Express, New York, NY	6/18/2012		30,329		57,016		2,856		98		-		90,299
Courtyard by Marriot, Ewing, NJ	8/13/2012		950		9,835		1,415		30		-		12,230

Total		$	39,854	$	111,410	$	9,641	$	2,284	$	(827)	$	163,189

On August 13, 2012, the Company purchased, from an unaffiliated seller, the remaining 50% ownership in Inn America Hospitality at Ewing, LLC (“Inn at Ewing”), the owner of the Courtyard by Marriot, Ewing, NJ. Consideration given for this interest in Inn at Ewing included the assumption of the property’s mortgage debt of $12,875.

On June 18, 2012, the Company purchased, from an unaffiliated seller, the remaining 50% ownership interest in Metro 29th Street Associates, LLC (“Metro 29th”), the lessee of the Holiday Inn Express, New York, NY. Consideration given for this interest in Metro 29th included $10,000 cash and the forgiveness of approximately $800 of accrued interest payable under a mezzanine loan made by the Company to an affiliate of the seller. Brisam Management DE, LLC (“Brisam”), as the owner of the land, building and improvements leased by Metro 29th, is considered a variable interest entity and, based on our evaluation, we determined that we are the primary beneficiary of this variable interest entity and therefore Brisam is consolidated in our financial statements. As a result, we included in our consolidated financial statements approximately $90,201 in investment in hotel properties and an aggregate of $73,038 in first mortgage and mezzanine debt at acquisition. On the date we acquired the remaining interest in Metro 29th, we determined that the stated rate of interest on the first mortgage debt was above market and, accordingly, recorded a $3,436 premium. Also included in this transaction was an option to acquire the equity interests in the entity owning the real estate assets or the real estate assets from Brisam for nominal consideration. The option is exercisable by the Company after September 1, 2016 or before that date in the event of certain specified events. The equity interest may be put to the Company by the Seller at any time. On June 29, 2012, the Company repaid the $15,000 mezzanine debt.

As shown in the table below, included in the consolidated statements of operations for the year ended December 31, 2012 are total revenues of $31,393 and total net income of $1,085 for hotels we have acquired and consolidated since the date of acquisition. These amounts represent the results of operations for these hotels since the date of acquisition:

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)


	Year Ended December 31,
	2013				2012
Hotel	Revenue		Net (Loss) Income		Revenue		Net (Loss) Income
The Rittenhouse Hotel, Philadelphia, PA	$	17,395	$	(2,827)	$	16,812	$	(1,834)
The Boxer, Boston, MA		3,799		(241)		2,791		574
Holiday Inn Express, New York, NY		16,746		1,541		10,170		2,142
Courtyard by Marriot, Ewing, NJ		4,210		875		1,620		203

Total	$	42,150	$	(652)	$	31,393	$	1,085

Pro Forma Results (Unaudited)

The following condensed pro forma financial data are presented as if all acquisitions completed since January 1, 2013 and 2012 had been completed on January 1, 2012 and 2011. Properties acquired without any operating history are excluded from the condensed pro forma operating results. The condensed pro forma financial data is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had been consummated on January 1, 2013 and 2012 at the beginning of the year presented, nor do they purport to represent the results of operations for future periods.



	Year Ended December 31,
	2013		2012
Pro Forma Total Revenues	$	353,407	$	331,587

Pro Forma Income from Continuing Operations	$	22,651	$	7,408
(Loss) Income from Discontinued Operations		29,195		14,720
Pro Forma Net Income		51,846		22,128
Loss Allocated to Noncontrolling Interest		271		(154)
Preferred Distributions		(14,611)		(14,000)
Extinguishment of Issuance Costs Upon Redemption of Series A Preferred Shares		(2,250)		-
Pro Forma Net (Loss) Income Applicable to Common Shareholders	$	35,256	$	7,974

Pro Forma Income Applicable to Common Shareholders per Common Share
Basic	$	0.18	$	0.04
Diluted	$	0.18	$	0.04

Weighted Average Common Shares Outstanding
Basic		198,390,450		187,415,270
Diluted		201,918,177		187,415,270

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Asset Development and Renovation

The Company has opportunistically engaged in development of hotel assets. On July 22, 2011, the Company completed the acquisition of the real property and improvements located at 32 Pearl Street, New York, NY, anticipated to become a Hampton Inn, from an unaffiliated seller for a total purchase price of $28,300. The property is a re-development project which was initiated in 2008.

In January 2014, the Company completed construction of an additional oceanfront tower, additional meeting space and structured parking on a land parcel adjacent to the Courtyard by Marriott, Miami, Florida, a hotel acquired on November 16, 2011. This land parcel was included in the acquisition of the hotel.

We capitalize expenditures related to hotel development projects and renovations, including indirect costs such as interest expense, real estate taxes and utilities related to hotel development projects and renovations.

We have capitalized the following indirect development costs for the years ended December 31, 2013, 2012 and 2011:


	Year Ended December 31,
	2013		2012		2011

Property Tax	$	388	$	296	$	218
Interest Expense		1,318		1,542		1,372
Utility		3		9		201
Total	$	1,709	$	1,847	$	1,791

In October 2012, Hurricane Sandy affected numerous hotels within our portfolio. Two hotels within our portfolio were significantly impacted by this natural disaster; one hotel was inoperable (Holiday Inn Express Water Street, New York, NY) and one hotel development project has incurred delays in construction (Hampton Inn, Pearl Street, New York, NY). We have recorded estimated property losses of $1,586 on the Holiday Inn Express Water Street and a corresponding insurance claim receivable of $1,486. This hotel re-opened in April 2013. We have recorded estimated property losses of $1,997 on the Hampton Inn Pearl Street and a corresponding insurance claim receivable of $1,897, and we expect this hotel to open in the first quarter of 2014. Of the $6,546 in aggregate insurance claims that we estimate to receive, $4,840 was received as of December 31, 2013. These aggregate claims include property losses and remediation costs.

Purchase and Sale Agreements

On September 20, 2013, the Company entered into a purchase and sale agreement to dispose of a portfolio of 16 non-core hotel properties. On December 18, 2013, we completed the sale of 12 of the 16 properties. See “Note 12 – Discontinued Operations” for more information.

On October 16, 2013, the Company entered into a purchase and sale agreement to acquire the Hotel Oceana, located in Santa Barbara, California, from an unaffiliated seller for approximately $42,000, including the assumption of $25,250 in mortgage debt. This transaction is expected to close by the end of first quarter 2014.

In February 2014, the Company entered into a purchase and sale agreement to sell the Hotel 373, New York, NY to an unaffiliated buyer for a total purchase price of $37,000. This property was acquired by the Company in June 2007. Due to the events of this transaction occurring after December 31, 2013, the Company did not classify this property as a discontinued asset as of December 31, 2013, and accordingly the operating results have not been reclassified for periods presented.