NOTE 2 – INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consists of the following at December 31, 2015 and December 31, 2014:



		December 31, 2015		December 31, 2014

Land	$	480,874	$	439,540
Buildings and Improvements		1,518,565		1,424,842
Furniture, Fixtures and Equipment		227,527		203,275
		2,226,966		2,067,657

Less Accumulated Depreciation		(395,847)		(322,174)

Total Investment in Hotel Properties	$	1,831,119	$	1,745,483

Depreciation expense was $73,672, $68,418 and $61,500 (including depreciation on assets held for sale) for the years ended December 31, 2015, 2014 and 2013, respectively.

During the year ended December 31, 2015, we acquired the following wholly-owned hotel properties:



Hotel	Acquisition Date		Land		Buildings and Improvements		Furniture Fixtures and Equipment		Other Intangibles			Loan Costs		Total Purchase Price		Assumption of Debt
St. Gregory Hotel, Washington, DC	6/16/2015	$	23,764	$	33,005	$	3,240	$	45		$	978	$	61,032	$	28,902	*
TownePlace Suites, Sunnyvale, CA	8/25/2015		-		18,999		2,348		6,453	**		-		27,800		-
Ritz-Carlton Georgetown, DC	12/29/2015		17,570		29,160		3,270		-			-		50,000		-
TOTAL		$	41,334	$	81,164	$	8,858	$	6,498		$	978	$	138,832	$	28,902

*Includes a $3,050 premium as we determined that the stated rate of interest on the assumed mortgage debt was above market.

**Acquired ground lease asset of $6,353 and intangible asset related to the franchise agreement of $100 with purchase of the property.

Acquisition-related costs, 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 year ended December 31, 2015, we paid $708 in acquisition costs related to the above acquired assets.

Included in the consolidated statements of operations for the year ended December 31, 2015 are total revenues of $7,150 and a total net income of $548 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,
	2015
Hotel		Revenue		Net Income
St. Gregory Hotel, Washington, DC	$	5,257	$	164
TownePlace Suites, Sunnyvale, CA		1,744		364
Ritz-Carlton Georgetown, DC		149		20
Total	$	7,150	$	548

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

Purchase and Sale Agreement

In October 2015, we entered into a purchase and sale agreement to purchase the Sanctuary Beach Resort in Monterey, CA from an unaffiliated buyer for a total purchase price of $39,500. The transaction closed on January 28, 2016. Upon closing, we assumed debt of $14,700. Accounting for this acquisition requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The purchase price allocations are estimated based on current available information; however, we still are in the process of obtaining appraisals and finalizing the accounting for the acquisition, which was acquired subsequent to year-end.

On February 4, 2016, we announced the signing of definitive agreements with Cindat Capital Management Limited to form a joint venture for 7 of our limited service hotels in Manhattan totaling 1,087 rooms for a total purchase price, including closing costs of $571,400, or $526 per key. The proposed joint venture is structured with Cindat as the preferred joint venture partner holding a 70.0% ownership stake, while we retain a 30% equity interest. We also announced the signing of a purchase and sale agreement to acquire the 238-room Hilton Garden Inn M Street, in Washington, DC for $106,500. These transactions are expected to close no later than March 31, 2016, and are subject to closing conditions, including the completion of the buyer’s due diligence. No assurance can be given that these transactions will close within the expected time frame or at all.

During the year ended December 31, 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 Milo, 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		-

Total		$	103,369	$	149,801	$	13,877	$	(14,230)	$	1,396	$	254,213	$	24,924

Acquisition-related costs, 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 year ended December 31, 2014, we paid $2,178 in acquisition costs related to the above acquired assets.

The purchase agreement for the acquisition of the Parrot Key Resort in Key West, FL, contained a provision that entitled 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, no liability was recorded as the fair market value of the contingent consideration was determined to be $0. Upon remeasurement at December 31, 2014, a liability was recorded as the fair market value of the contingent consideration was determined to be $2,000.

On May 27, 2014, we completed the acquisition of the Hilton Garden Inn 52nd Street hotel in New York, NY from an unaffiliated seller. 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 significant price appreciation 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 gain of approximately $13,594, which is net of preopening expenses of $927 on the statement of operations, as the fair value of the asset acquired less any liabilities assumed exceeded the consideration transferred.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

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:



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	$	13,594	$	1,074	$	111,162	$	1,123	$	112,285

Included in the consolidated statement of operations for the year ended December 31, 2014 are total revenues of $28,239 and a total net income of $6,219 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,
	2014
Hotel		Revenue		Net Income
Hotel Milo, Santa Barbara, CA	$	8,655	$	668
Parrot Key Resort, Key West, FL		9,145		2,978
Hilton Garden Inn 52nd Street, New York, NY		10,439		2,573

Total	$	28,239	$	6,219

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 $9,564, which equates to a total carrying value of approximately $37,864 when 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.

NOTE 2 – INVESTMENT IN HOTEL PROPERTIES (CONTINUED)

We have capitalized the following indirect development costs for the years ended December 31, 2015, 2014 and 2013:



	Year Ended December 31,
	2015			2014		2013

Property Tax	$	-	$	223	223	$	388
Interest Expense		-		458	458		1,320
Utilities		-		73	73		3
Total	$	-	$	754	754	$	1,711

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 reopened 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 $4,604, which included business interruption claims.

Pro Forma Results (Unaudited)

The following condensed pro forma financial data are presented as if all acquisitions completed since January 1, 2015 and 2014 had been completed on January 1, 2014 and 2013. 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, 2015 and 2014 at the beginning of the year presented, nor do they purport to represent the results of operations for future periods.



		Year Ended December 31,
	2015		2014
Pro Forma Total Revenues		493,096		456,189

Pro Forma Income from Continuing Operations		43,180		73,717
Loss from Discontinued Operations		-		(1,665)
Pro Forma Net Income		43,180		72,052
(Loss) Allocated to Noncontrolling Interest		(448)		(1,144)
Preferred Distributions		(14,356)		(14,356)
Pro Forma Net Income Applicable to Common Shareholders	$	28,376	$	56,552

Pro Forma Income Applicable to Common Shareholders per Common Share
Basic	$	0.59	$	1.14
Diluted	$	0.59	$	1.12

Weighted Average Common Shares Outstanding
Basic		47,786,811		49,777,302
Diluted		48,369,658		50,307,506