NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at June 30, 2014 and December 31, 2013:



		June 30, 2014		December 31, 2013

Land	$	439,540	$	339,027
Buildings and Improvements		1,415,055		1,222,639
Furniture, Fixtures and Equipment		193,483		171,116
Construction in Progress		-		63,168
		2,048,078		1,795,950

Less Accumulated Depreciation		(287,185)		(260,115)

Total Investment in Hotel Properties	$	1,760,893	$	1,535,835

During the six months ended June 30, 2014, we acquired the following wholly-owned hotel properties:



Hotel	Acquisition Date		Land		Buildings and Improvements		Furniture Fixtures and Equipment		Ground Lease Intangible		Franchise Fees and Loan Costs		Total Purchase Price		Assumption of Debt
Hotel Oceana, Santa Barbara, CA	2/28/2014	$	-	$	55,080	$	805	$	(14,230)	$	273	$	41,928	$	24,924
Parrot Key Resort, Key West, FL	5/7/2014		57,889		33,959		8,152		-		-		100,000		-
Hilton Garden Inn 52nd Street, New York, NY	5/27/2014		45,480		60,762		4,920		-		1,123		112,285		-

Acquisition-related cost, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the above acquired assets. During the six months ended June 30, 2014, we paid $1,861 in acquisition costs related to the above acquired asset.

The purchase agreement for the acquisition of the Parrot Key Resort in Key West, FL, contains a provision that entitles the seller to additional consideration of $2,000 contingent upon the hotel achieving certain net operating income thresholds within twelve months of acquisition. At the time of acquisition and upon remeasurement at June 30, 2014, no liability was recorded as the fair market value of the contingent consideration was determined to be $0.

On May 27, 2014, we completed the acquisition of the Hilton Garden Inn 52nd Street hotel in New York, NY from RS 206 LLC. Previously, we had entered into a purchase and sale agreement to acquire this property for total consideration of $84,000. The purchase price for this property was contractually fixed on August 23, 2012, the date we entered into the purchase and sale agreement. During the 21-month period of time between entering in the purchase and sale agreement on August 23, 2012 and the closing date, the real estate market for hotels located in Manhattan experienced an increase in valuations due to improved economic conditions in the market and in the overall economy. This resulted in an increase in the fair value of the property at the time of closing the acquisition, and as such, we recognized a net gain of approximately $13,727 as the fair value of the asset acquired less any liabilities assumed exceeded the consideration transferred.

Consideration given in exchange for the property included $27,500 paid in cash to the seller and our reinstatement and cancellation of a development loan receivable in the original principal amount of $10,000 and $12,494 of accrued interest and late fees. This development loan receivable had previously been fully impaired in 2009, but was recovered as part of this acquisition. As a result, we recognized a gain of $22,494 on the recovery of the previously impaired development loan. In addition, we paid off the existing construction financing and entered into a new mortgage loan of $45,000. Concurrent with our entry into the new mortgage loan, we entered into an interest rate cap and swap – see “Note 7 – Fair Measurements and Derivative Instruments” for more information on this derivative. No other consideration was exchanged in connection with the acquisition of this property. Below is a tabular reference to illustrate the components of the consideration and fair value of the property:

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)


Hotel		Initial Purchase Price		Interest and Late Fees on Development Loan		Non-Cash Fair Market Value Gain on Acquisition		Other		Fair Market Value At Acquisition		Franchise Fees and Loan Costs		Asset Value Upon Acquisition
Hilton Garden Inn 52nd Street, New York, NY	$	84,000	$	12,494	$	13,727	$	941	$	111,162	$	1,123	$	112,285

Included in the consolidated statement of operations for the three and six months ended June 30, 2014 are total revenues of $5,920 and $6,632, respectively, and total net income of $1,115 and $1,144, respectively, for the hotels we acquired during the six months ended June 30, 2014 and consolidated since the date of acquisition of each hotel.



	Three Months Ended June 30,				Six Months Ended June 30,
	2014				2014
Hotel		Revenue		Net Income		Revenue		Net Income
Hotel Oceana, Santa Barbara, CA	$	2,588		262		3,300		291
Parrot Key Resort, Key West, FL		2,189		716		2,189		716
Hilton Garden Inn 52nd Street, New York, NY		1,143		137		1,143		137

Total	$	5,920	$	1,115	$	6,632	$	1,144

Pro Forma Results (Unaudited)

The following condensed pro forma financial data for the three and six months ended June 30, 2014 and 2013, are presented as if the hotels acquired by the Company in 2014 (excluding the Hilton Garden Inn 52nd Street hotel, which did not have any operating history prior to acquisition) had been acquired as of January 1, 2013 and the four hotels acquired by the Company in 2013 (other than the Hyatt Union Square, which did not have any operating history prior to acquisition) had been acquired as of January 1, 2012. The condensed pro forma financial data is not necessarily indicative of what actual results of operations of the Company would have been for the periods presented assuming the acquisitions had been consummated on January 1, 2013 and January 1, 2012 at the beginning of the year presented, nor do they purport to represent the results of operations for future periods.



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Pro Forma Total Revenues	$	113,326	$	101,589	$	199,126	$	180,195

Pro Forma Income from Continuing Operations	$	59,429	$	19,566	$	56,354	$	15,436
Income (Loss) from Discontinued Operations		-		12		(1,415)		(1,103)
Pro Forma Net Income		59,429		19,578		54,939		14,333
(Loss) Income Allocated to Noncontrolling Interest		(1,683)		(260)		(1,244)		328
Preferred Distributions		(3,589)		(3,589)		(7,178)		(7,433)
Extinguishment of Issuance Costs Upon Redemption of Series A Preferred Shares		-		-		-		(2,250)
Pro Forma Net Income Applicable to Common Shareholders	$	54,157	$	15,729	$	46,517	$	4,978

Pro Forma Income Applicable to Common Shareholders per Common Share
Basic	$	0.27	$	0.08	$	0.23	$	0.03
Diluted	$	0.27	$	0.08	$	0.23	$	0.02

Weighted Average Common Shares Outstanding
Basic		198,494,473		198,633,051		199,612,898		197,835,465
Diluted		200,213,554		201,201,337		201,015,581		201,083,900

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Asset Development and Renovation

The Company has opportunistically engaged in the 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, from an unaffiliated seller for a total purchase price of $28,300. On June 23, 2014, this property opened as a Hampton Inn. The total construction costs spent on this property since acquisition were $9,122, which equated to a total carrying value of approximately $37,422 at the time the property opened.

In January 2014, the Company completed the construction of an additional oceanfront tower, additional meeting space and structured parking on a land parcel adjacent to the Courtyard by Marriott, Miami, FL, 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 three and six months ended June 30, 2014 and 2013:



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013

Property Tax	$	114	$	84	$	223	$	167
Interest Expense		216		318		458		593
Utility		62		1		70		2
Total	$	392	$	403	$	751	$	762

During the second quarter of 2014, we finalized our settlement of the insurance claim we had for losses incurred as a result of Hurricane Sandy. 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, which was subsequently completed on June 23, 2014, incurred delays in construction (Hampton Inn, Pearl Street, New York, NY). Prior to March 31, 2014, we had 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 also had recorded estimated property losses of $1,997 on the Hampton Inn Pearl Street and a corresponding insurance claim receivable of $1,897. This hotel opened in June 2014. As a result of the claim settlement, we recorded a gain on insurance settlements of approximately $4,602, which included business interruption claims.