S-4 1 tm2024928-1_s4.htm S-4 tm2024928-1_s4 - none - 76.7402514s
As filed with the Securities and Exchange Commission on July 20, 2020
Registration No. 333-                  
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ASHFORD HOSPITALITY TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
6798
86-1062192
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
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)
Robert G. Haiman
Executive Vice President, General Counsel and Secretary
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 of all communications to:
Richard M. Brand
William P. Mills
Gregory P. Patti Jr.
Cadwalader, Wickersham & Taft LLP
200 Liberty Street
New York, NY 10281
(212) 504-6000
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ☐
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(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. ☐
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i)
(Cross-Border Issuer Tender Offer)

Exchange Act Rule 14d-1(d)
(Cross-Border Third-Party Tender Offer)
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered
Amount to be
Registered(1)
Offering Price Per
Security
Aggregate Offering
Price(2)
Registration Fee(3)
Common Stock, par value $0.01
59,635,998 n/a $ 342,608,808.51 $ 44,470.62
(1)
This Registration Statement registers the maximum number of shares of the Registrant’s common stock, par value $0.01 per share (the “Common Stock”), that may be issued in connection with the exchange offers (the “Exchange Offers”) by the Registrant to exchange shares of common stock or cash for its shares of (a) 8.45% Series D Cumulative Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”), (b) 7.375% Series F Cumulative Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), (c) 7.375% Series G Cumulative Preferred Stock, par value $0.01 per share (the “Series G Preferred Stock”), (d) 7.50% Series H Cumulative Preferred Stock, par value $0.01 per share (the “Series H Preferred Stock”), and (e) 7.50% Series I Cumulative Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”). The Series D Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock and Series I Preferred Stock are collectively referred to as the “Preferred Stock.”
(2)
Estimated solely for purposes of the registration fee for this offering in accordance with Rule 457(c) of the Securities Act of 1933, on the basis of the average of the high and low prices of the Common Stock on the New York Stock Exchange on July 16, 2020. The Common Stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “AHT.”
(3)
Calculated pursuant to Rule 457(c) based on the proposed maximum offering price.
The Company hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Company shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this Prospectus/Consent Solicitation is not complete and may be changed. These securities may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This Prospectus/Consent Solicitation is not an offer to sell securities nor does it seek an offer to buy those securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 20, 2020
Prospectus/Consent Solicitation
[MISSING IMAGE: lg_ashfordhospittrust-bw.jpg]
ASHFORD HOSPITALITY TRUST, INC.
OFFER TO EXCHANGE
and
CONSENT SOLICITATION
Ashford Hospitality Trust, Inc. (the “Company,” “our,” “we” or “us”) is offering, upon the terms and subject to the conditions set forth in this prospectus, to exchange any and all of the outstanding shares of the following series of its preferred stock for, at the election of each holder, the consideration defined below (each an “Exchange Offer” and collectively the “Exchange Offers”):
Security
CUSIP
Symbol
Shares
Outstanding
Cash Option
Per Share
Stock Option Per Share
8.45% Series D Cumulative Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”)
044103406 AHTprD 2,389,393
$9.75 in cash (the “Series D Cash Option”)
2.64 shares of newly issued common stock of the
Company, par value $0.01 (the “Common Stock”) (the
Series D Stock Option”, and together with the Series D
Cash Option, the “Series D Consideration Options”).
7.375% Series F Cumulative Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”) 044103604 AHTprF 4,800,000 $9.75 in cash (the “Series F Cash Option”) 2.64 shares of newly issued Common Stock (the
Series F Stock Option”, and together with the Series F
Cash Option, the “Series F Consideration Options”).
7.375% Series G Cumulative Preferred Stock, par value $0.01 per share (the “Series G Preferred Stock”)
044103703 AHTprG 6,200,000
$9.75 in cash (the “Series G Cash Option”)
2.64 shares of newly issued Common Stock (the
Series G Stock Option”, and together with the Series G
Cash Option, the “Series G Consideration Options”).
7.50% Series H Cumulative Preferred Stock, par value $0.01 per share (the “Series H Preferred Stock”) 044103802 AHTprH 3,800,000 $9.75 in cash (the “Series H Cash Option”) 2.64 shares of newly issued Common Stock (the
Series H Stock Option”, and together with the Series H
Cash Option, the “Series H Consideration Options”).
7.50% Series I Cumulative Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”)
044103885 AHTprI 5,400,000
$9.75 in cash (the “Series I Cash Option”)
2.64 shares of newly issued Common Stock (the “Series I Stock Option”, and together with the Series I Cash Option, the “Series I Consideration Options”).
The consideration defined in the table above is based in part on the prices for the Preferred Stock and the Common Stock as of July 17, 2020 and may be revised prior to launching this Exchange Offer.
As used herein, the shares of Series D Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock and Series I Preferred Stock are collectively referred to as the “Preferred Stock”, and the Series D Consideration Options, the Series F Consideration Options, the Series G Consideration Options, the Series H Consideration Options and the Series I Consideration Options are collectively referred to as the “Consideration Options”.
As used herein, the Series D Cash Option, the Series F Cash Option, the Series G Cash Option, the Series H Cash Option and the Series I Cash Option are collectively referred to as the “Cash Options” and the Series D Stock Option, the Series F Stock Option, the Series G Stock Option, the Series H Stock Option and the Series I Stock Option are collectively referred to as the “Stock Options”.

As set forth in the table below and described further in the paragraph that immediately follows, the Cash Option is subject to the following limitations:
Series of Preferred Stock
Maximum Aggregate Cash Per Series
Maximum Shares of Preferred Stock that
Can Elect Cash Option Without Proration
Series D Preferred Stock $3,200,000 (the “Maximum Series D Cash Amount”)
328,205 (the “Maximum Series D Cash Shares”)
Series F Preferred Stock $6,400,000 (the “Maximum Series F Cash Amount”)
656,410 (the “Maximum Series F Cash Shares”)
Series G Preferred Stock $8,200,000 (the “Maximum Series G Cash Amount”)
841,026 (the “Maximum Series G Cash Shares”)
Series H Preferred Stock $5,000,000 (the “Maximum Series H Cash Amount”)
512,820 (the “Maximum Series H Cash Shares”)
Series I Preferred Stock $7,200,000 (the “Maximum Series I Cash Amount”)
738,462 (the “Maximum Series I Cash Shares”)
As used herein, the Maximum Series D Cash Amount, the Maximum Series F Cash Amount, the Maximum Series G Cash Amount, the Maximum Series H Cash Amount and the Maximum Series I Cash Amount are collectively referred to as the “Maximum Aggregate Cash Per Series”, and the Maximum Series D Cash Shares, the Maximum Series F Cash Shares, the Maximum Series G Cash Shares, the Maximum Series H Cash Shares and the Maximum Series I Cash Shares are collectively referred to as the “Maximum Cash Shares”. Holders of each series of Preferred Stock (the “Preferred Holders”) who elect the Cash Option will be subject to allocation and proration procedures intended to ensure that, within each series of Preferred Stock, no more than the Maximum Aggregate Cash Per Series will be issued to the Preferred Holders of that series of Preferred Stock. Proration will occur if the holders of Preferred Stock for each series tender more than the Maximum Cash Shares for that series and elect the Cash Option, in which case the amount of cash received by each Preferred Holder will be prorated among the number of shares validly tendered and not withdrawn according to a formula that takes into account the relative value of the Cash Option offered in each Exchange Offer. The Preferred Holder will instead receive share of Common Stock for the portion of the cash consideration that they did not receive.
Concurrently with and as an integral part of the Exchange Offers, we are also soliciting consents (the “Consent Solicitation”) from holders of each series of Preferred Stock to the amendment of our corporate charter, as currently in effect (the “Charter”), to automatically convert and reclassify each share of Preferred Stock into the All Stock Remainder Consideration as described in this document. In order to validly tender your shares of Preferred Stock in the Exchange Offers, you must follow the procedures described in this prospectus and consent to this Charter amendment.
Among other conditions, consummation of the Exchange Offer for each series of Preferred Stock is conditioned on at least 66 2/3% of the outstanding shares of that series of Preferred Stock being tendered in the Exchange Offers for that series and not withdrawn (each, an “Individual Series Minimum Condition”). The Exchange Offer for each series of Preferred Stock is not conditioned on any minimum participation level for any other series of Preferred Stock, and the Company may close the Exchange Offer for each series for which the Individual Series Minimum Condition is satisfied even if the Exchange Offer for other series do not meet the Individual Series Minimum Condition. The Exchange Offers are also conditioned on our ability to issue or sell securities or enter into an alternative capital raising transaction (the “Financing Transaction”) pursuant to which not less than $30,000,000 is raised for the purpose of funding the Cash Options on terms reasonably satisfactory to the Company in our sole discretion (the “Financing Condition”), including the determination of our Board of Directors that the proceeds of the Financing Transaction will be lawfully available to pay the Cash Options.
You must validly tender all shares that you own in a series of Preferred Stock and deliver your consent to the proposed amendments to the Charter to modify the terms of that series of Preferred Stock in order to participate in the Exchange Offer with respect to that series of Preferred Stock and the Consent Solicitation. No partial tenders within a series of Preferred Stock will be accepted. If you own more than one series of Preferred Stock, you can tender all shares that you own in one series of Preferred Stock without tendering any of the shares that you own in another series of Preferred Stock.
As of close of business on July 17, 2020, 10,475,199 shares of Common Stock were outstanding after giving effect to the Company’s 1-for-10 reverse stock split that became effective on July 15, 2020. The Common Stock is listed on the NYSE under the symbol “AHT.” On July 17, 2020, the last reported sales price of the Common Stock (after giving effect to the reverse stock split) was $6.93 per share, the last reported sales price of the Series D Preferred Stock was $7.05 per share, the last reported sales price of the Series F Preferred Stock was $6.55 per share, the last reported sales price of the Series G Preferred Stock was $6.69 per share, the last reported sales price of the Series H Preferred Stock was $6.45 per share and the last reported sales price of the Series I Preferred Stock was $6.50 per share.
Each of Exchange Offers and the Consent Solicitation will expire at 11:59 p.m., New York City time, on [•], 2020 (the “Expiration Date”), unless extended or terminated by us, in which case the term “Expiration Date” with respect to any Exchange Offer means the latest time and date on which the Exchange Offer and the Consent Solicitation for such series of Preferred Stock, as so extended, expires.
The Board of Directors has authorized and approved the Exchange Offers and the Consent Solicitation. None of the Board of Directors, our officers and employees, the Information Agent, the Exchange Agent or any of our financial advisors is making a recommendation to any holder of Preferred Stock as to whether you should tender shares. You must make your own

investment decision regarding the Exchange Offers and the Consent Solicitation based upon your own assessment of the market value of the Preferred Stock, the likely value of the Common Stock you may receive in the Exchange Offers and the Consent Solicitation, the effect of holding shares of Preferred Stock upon the approval of the proposed amendments, your liquidity needs, your investment objectives and any other factors you deem relevant.
With respect to any tender in an amount up to [•] shares of Preferred Stock that is accepted in the Exchange Offers from any eligible soliciting dealer, we will pay to the relevant eligible soliciting dealer a fee (the “Retail Processing Fee”) equal to [•]% of the principal amount of such shares of Preferred Stock validly tendered and accepted for exchange. In order to be eligible to receive the Retail Processing Fee, any soliciting dealer must properly complete a soliciting dealer form and deliver it to the Dealer Manager prior to the applicable Expiration Date. See “The Exchange Offers and the Consent Solicitation—Retail Processing Fee.”
Our Exchange Offers and the Consent Solicitation are subject to the conditions listed under “The Exchange Offers and the Consent Solicitation—Conditions of the Exchange Offers.” There are multiple conditions to the closing of the Exchange Offers that are beyond our control, and we cannot provide you any assurance that these conditions will be satisfied or that the Exchange Offers will close.
Exchanging your Preferred Stock for an investment in the Common Stock involves risks. See “Risk Factors” beginning on page 26 of this document for a discussion of factors that you should consider in connection with the Exchange Offers and the Consent Solicitation.
If you wish to tender shares of Preferred Stock and deliver your consent in one or more of the Exchange Offers, you should follow the instructions beginning on page 76 of this document. If you wish to withdraw your tender and consent, you may do so by following the instructions set forth in this Prospectus/Consent Solicitation. Any holder who withdraws a prior tender may tender for a different Consideration Option by instructing their custodial entity to tender their shares.
We Are Not Asking You for a Proxy and You are Requested Not To Send Us a Proxy.
Neither the Securities and Exchange Commission nor any state securities authority has approved or disapproved this transaction or these securities or determined the fairness or merits of this transaction or Prospectus/Consent Solicitation, or determined if this Prospectus/Consent Solicitation is truthful or complete. Any representation to the contrary is a criminal offense.
Dealer Manager and Solicitation Agent
RBC Capital Markets
The date of this Prospectus/Consent Solicitation is [•], 2020.

 
ADDITIONAL INFORMATION
We engaged D.F. King & Co., Inc. to act as the information agent in connection with the Exchange Offers and the Consent Solicitation. Requests for assistance or additional copies of this document should be delivered to aht@dfking.com. Questions may be directed to D.F. King & Co., Inc. at (212) 269-5550 for banks and brokers, and at (800) 967-4607 for all other callers (toll-free).
 

 
TABLE OF CONTENTS
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F-1
 
iv

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Throughout this Prospectus/Consent Solicitation, we make forward-looking statements that are subject to risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “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:

the impact of the novel strain of coronavirus (COVID-19) and numerous governmental travel restrictions and other orders on our business;

our business and investment strategy;

anticipated or expected purchases or sales of assets;

our projected operating results;

completion of any pending transactions;

our ability to obtain future financing arrangements or restructure existing property level indebtedness;

our understanding of our competition;

market trends;

projected capital expenditures; and

the impact of technology on our operations and business.
Such forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance taking into account all information currently known to us. These beliefs, assumptions, and expectations can change as a result of many potential events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations, plans, and other objectives may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our securities. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

factors discussed in our Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 12, 2020, including those set forth under the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and “Properties,” as supplemented by our Current Report on Form 8-K filed May 8, 2020, our subsequent Quarterly Reports on Form 10-Q and other filings under the Exchange Act;

adverse effects of the novel strain of coronavirus (COVID-19), including a general reduction in business and personal travel and travel restrictions in regions where our hotels are located;

ongoing negotiations with our lenders regarding potential forbearance or the exercise by our lenders of their remedies for default under our loan agreements;

actions by our lenders to accelerate loan balances and foreclose on the hotel properties that are security for our loans that are in default;

general volatility of the capital markets and the market price of our common and preferred stock;

general and economic business conditions affecting the lodging and travel industry;

changes in our business or investment strategy;

availability, terms, and deployment of capital;

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

changes in our industry and the market in which we operate, interest rates, or local economic conditions;

the degree and nature of our competition;
 
1

 

actual and potential conflicts of interest with Ashford Inc. and its subsidiaries (including Ashford Hospitality Advisors LLC (“Ashford LLC”), Remington Hotels, Premier Project Management LLC (“Premier”), Braemar Hotels & Resorts Inc. (“Braemar”)), our executive officers and our non-independent directors;

changes in personnel of Ashford LLC 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 Internal Revenue Code of 1986, as amended (the “Code”), and related rules, regulations and interpretations governing the taxation of real estate investment trusts; and

limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify as a REIT for federal income tax purposes.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Prospectus/Consent Solicitation could cause our actual results and performance to differ significantly from those contained in our forward-looking statements. Additionally, many of these risks and uncertainties are currently amplified by and will continue to be amplified by, or in the future may be amplified by, the COVID-19 outbreak and the numerous government travel restrictions imposed in response thereto. The extent to which COVID-19 impacts us will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. 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/Consent Solicitation. Furthermore, we do not intend to update any of our forward-looking statements after the date of this Prospectus/Consent Solicitation to conform these statements to actual results and performance, except as may be required by applicable law.
 
2

 
HOW TO OBTAIN ADDITIONAL INFORMATION
This Prospectus/Consent Solicitation contains certain business and financial information about the Company that is not included in or delivered with this document. We maintain a website at www.ahtreit.com. On our website, we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with the SEC. In addition, our Code of Business Conduct and Ethics, Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, Corporate Governance Guidelines and Board Committee Charters are also available free-of-charge on our website or can be made available in print upon request. The information contained on our website is expressly not incorporated by reference into this proxy statement/prospectus.
All reports filed with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549-1090. Further information regarding the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. In addition, all of our filed reports can be obtained at the SEC’s website at www.sec.gov.
If you would like additional copies of this Prospectus/Consent Solicitation, or if you have questions about the Exchange Offers or the Consent Solicitation, you should contact:
D.F. King & Co., Inc.
48 Wall Street, 22 Floor
New York, New York 10005
Banks and Brokers Call Collect: (212) 269-5550
All Others Call Toll-Free: (800) 967-4607
Email: aht@dfking.com
We have not authorized anyone to give any information or make any representation about our Exchange Offers or the Consent Solicitation that is different from, or in addition to, that contained in this Prospectus/Consent Solicitation or in any of the materials that we have incorporated into this Prospectus/Consent Solicitation. Therefore, if anyone gives you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this document are unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the Exchange Offers and the Consent Solicitation presented in this document do not extend to you. We are not aware, however, of any jurisdiction in which the transactions of this type would be unlawful.
 
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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION
Q:
WHY IS THE COMPANY OFFERING TO EXCHANGE THE PREFERRED STOCK?
A:
The Exchange Offers are part of our recapitalization to improve our capital structure in light of the impacts of the novel coronavirus (“COVID-19”) on our business. The Series D Preferred Stock was issued with an annual dividend equivalent to 8.45%, the Series F Preferred Stock was issued with an annual dividend equivalent to 7.375%, the Series G Preferred Stock was issued with an annual dividend equivalent to 7.375%, the Series H Preferred Stock was issued with an annual dividend equivalent to 7.50% and the Series I Preferred Stock was issued with an annual dividend equivalent to 7.50%. We did not pay dividends on any series of Preferred Stock in the second quarter of 2020, and we do not expect to pay dividends on any series of Preferred Stock for the foreseeable future. The unpaid dividends on the Preferred Stock will continue to accumulate (whether or not declared or paid) at a rate of approximately $10.6 million per quarter, and will result in a significant financial burden for the Company over time. Further, the aggregate liquidation preference of all series of Preferred Stock, which does not include the accumulated unpaid dividends, is $564.7 million as of July 17, 2020, compared to the aggregate market value of all series of Preferred Stock of $149,373,220.65 based on the last reported sales prices of each series of Preferred Stock on July 17, 2020. All accumulated and unpaid dividends on our Preferred Stock must be paid prior to any payments of dividends or other distributions on our Common Stock, and this recapitalization would have the result of removing this dividend priority and eliminating the Preferred Stock. If the Exchange Offers are consummated, approximately $10.6 million in accumulated and unpaid dividends on the Preferred Stock (through June 30, 2020) will not be paid, no further dividends on the Preferred Stock will accumulate and the Preferred Stock will be eliminated.
Q:
WHY IS THE COMPANY SOLICITING CONSENT FROM THE PREFERRED HOLDERS?
A:
As part of the Exchange Offers, we are soliciting consent from the holders of each series of Preferred Stock to the amendment to our corporate charter (the “Charter”), to modify the terms of each such series of Preferred Stock (the “Proposed Amendments”). The Proposed Amendments must be approved by the holders of 66 2/3% of the outstanding Common Stock to effect the Proposed Amendments at a special meeting of holders of Common Stock (the “Special Meeting”). Consent to the Proposed Amendments applicable to a series of Preferred Stock must be received from holders of at least 66 2/3% of the outstanding shares of that series of Preferred Stock for the Proposed Amendments to be effective and to effect the Exchange Offers with respect to that series of Preferred Stock. We are holding a Special Meeting to obtain the approval of the holders of our Common Stock to the Proposed Amendments, as well as to approve the issuance of shares of Common Stock in the Exchange Offers, as required by the rules of the NYSE.
The following is a summary of the Proposed Amendments and is qualified in its entirety by reference to the Charter and the amended text of the affected provisions of our Charter reflecting the Proposed Amendments, set forth in Annex A. The Proposed Amendments, if approved by our shareholders, would:
1.
automatically reclassify and convert each share of Series D Preferred Stock that remains outstanding after the Exchange Offer closes into 1.02 shares of our Common Stock (the “Series D All Stock Remainder Consideration”) and eliminate the description of the Series D Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock;
2.
automatically reclassify and convert each share of Series F Preferred Stock that remains outstanding after the Exchange Offer closes into 1.02 shares of our Common Stock (the “Series F All Stock Remainder Consideration”) and eliminate the description of the Series F Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock;
3.
automatically reclassify and convert each share of Series G Preferred Stock that remains outstanding after the Exchange Offer closes into 1.02 shares of our Common Stock (the “Series G All Stock Remainder Consideration”) and eliminate the description of the Series G Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock;
 
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4.
automatically reclassify and convert each share of Series H Preferred Stock that remains outstanding after the Exchange Offer closes into 1.02 shares of our Common Stock (the “Series H All Stock Remainder Consideration”) and eliminate the description of the Series H Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock; and
5.
automatically reclassify and convert each share of Series I Preferred Stock that remains outstanding after the Exchange Offer closes into 1.02 shares of our Common Stock (the “Series I All Stock Remainder Consideration”, together with the Series D All Stock Remainder Consideration, the Series F All Stock Remainder Consideration, the Series G All Stock Remainder Consideration and the Series H All Stock Remainder Consideration, the “All Stock Remainder Consideration”) and eliminate the description of the Series I Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock.
The All Stock Remainder Consideration is based in part on the price for the Preferred Stock and the Common Stock as of July 17, 2020 and may be revised prior to launching this Exchange Offer. The All Stock Remainder Consideration will be paid as soon as reasonably practical after, but no sooner than 11 business days after and no later than 180 calendar days after, the closing of the Exchange Offer relating to any such series of Preferred Stock.
If the holders of 66 2/3% of the outstanding Common Stock at the Special Meeting, to effect the Proposed Amendments have approved the Proposed Amendments at the Special Meeting, we will file Articles of Amendment with the State Department of Assessments and Taxation of Maryland (the “SDAT”) to effect the Proposed Amendments related to a series of Preferred Stock promptly after the expiration of the Exchange Offer for such series of Preferred Stock if the holders of 66 2/3% of the outstanding shares of the series of Preferred Stock have been tendered and thereby consent to the Proposed Amendments.
For additional information regarding the Consent Solicitation, see “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions.” We urge you to review.
Q:
IF I PARTICIPATE, WHAT WILL I RECEIVE IN EXCHANGE FOR MY SHARES OF PREFERRED STOCK?
A:
For each share of Preferred Stock validly tendered and not properly withdrawn by you, you will receive, at your election, the Cash Option or Stock Option identified below, subject to the proration and allocation procedures described in this Prospectus/Consent Solicitation:
Security
Cash Option Per
Share
Stock Option Per Share
Series D Preferred Stock
$9.75 in cash
2.64 shares of newly issued Common Stock
Series F Preferred Stock
$9.75 in cash
2.64 shares of newly issued Common Stock
Series G Preferred Stock
$9.75 in cash
2.64 shares of newly issued Common Stock
Series H Preferred Stock
$9.75 in cash
2.64 shares of newly issued Common Stock
Series I Preferred Stock
$9.75 in cash
2.64 shares of newly issued Common Stock
On July 17, 2020, the last reported sales price of the Common Stock (after giving effect to the reverse stock split) was $6.93 per share, the last reported sales price of the Series D Preferred Stock was $7.05 per share, the last reported sales price of the Series F Preferred Stock was $6.55 per share, the last reported sales price of the Series G Preferred Stock was $6.69 per share, the last reported sales price of the Series H Preferred Stock was $6.45 per share and the last reported sales price of the Series I Preferred Stock was $6.50 per share.
Q:
IF I DO NOT PARTICIPATE BUT THE EXCHANGE OFFER IS COMPLETED, WHAT WILL I RECEIVE IN EXCHANGE FOR MY SHARES OF PREFERRED STOCK?
A:
For each share of Preferred Stock that is not validly tendered, or which is validly tendered but is later properly withdrawn, you will receive the applicable All Stock Remainder Consideration specified herein.
 
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In each case, that will provide you with a substantially lower number of shares of our Common Stock than you would have received had you validly tendered and not properly withdrawn your shares of Preferred Stock and selected the Stock Option.
Q:
IS SUFFICIENT CASH AVAILABLE IN THE EXCHANGE OFFERS TO FULLY PROVIDE THE CASH OPTION TO THE PREFERRED HOLDERS, IF ALL OF THE PREFERRED HOLDER SELECT THE CASH OPTION?
A.
No. As set forth in the table below and described further in the paragraph that immediately follows, the Cash Option is subject to the following limitations:
Series of Preferred Stock
Maximum Aggregate Cash
Per Series
Maximum Cash Shares
Series D Preferred Stock
$ 3,200,000 328,205
Series F Preferred Stock
$ 6,400,000 656,410
Series G Preferred Stock
$ 8,200,000 841,026
Series H Preferred Stock
$ 5,000,000 512,820
Series I Preferred Stock
$ 7,200,000 738,462
The Preferred Holders who elect the Cash Option will be subject to allocation and proration procedures intended to ensure that, within each series of Preferred Stock, no more than the Maximum Aggregate Cash Per Series will be issued to the Preferred Holders of that series of Preferred Stock. Proration will occur if the holders of Preferred Stock for each series tender more than the Maximum Cash Shares for that series and elect the Cash Option, in which case the amount of cash received by each Preferred Holder will be prorated among the number of shares validly tendered and not withdrawn according to a formula that takes into account the relative value of the Cash Option offered in each Exchange Offer. The Preferred Holder will instead receive share of Common Stock for the portion of the cash consideration that they did not receive.
The chart below provides an example of how the proration is calculated:
Series of Preferred
Stock
Amount of
Preferred Shares
Tendered for
Cash Option
Cash Owed
Exceeds
Maximum
Aggregate Cash
Per Series?
Proration
Factor
Amount of
Common
Stock
Issued
Amount of
Cash Issued
Series D Preferred Stock
100 $ 975 No n/a 0 $ 975.00
Series F Preferred Stock
100,000 $ 975,000 No n/a 0 $ 975,000.00
Series G Preferred Stock
200,000 $ 1,950,000 No n/a 0 $ 1,950,000.00
Series H Preferred Stock
1,000,000 $ 9,750,000 Yes 0.513 1,286,155 $ 4,999,995.00
Series I Preferred Stock
1,500,000 $ 14,625,000 Yes 0.492 2,010,463 $ 7,199,994.75
See “The Exchange Offers and the Consent Solicitation—Exchange Offers Consideration Explanation and Examples.”
Q:
HOW WILL THE COMPANY PAY FOR THE SHARES OF PREFERRED STOCK THAT ELECT THE CASH OPTIONS?
A.
The maximum aggregate Offer Consideration for shares purchased in the Exchange Offers that elect the Cash Options will be $30,000,000. We expect to fund the Cash Options in the Exchange Offers with capital we raise by issuing or selling securities (that may be convertible into Common Stock) in a public or private offering, or by entering into an alternative capital raising transaction, which may include the potential issuance of convertible preferred debt, a potential real estate joint venture in which a third party would pay us cash for an interest in a to-be-formed joint venture holding some of our hotels or financing arrangements secured through government programs. The Exchange Offers are subject to the Financing Condition. If we are not able to satisfy the Financing Condition, we will not be required to close the Exchange Offers and accept tendered shares. The Exchange Offers are also subject to other conditions described under “The Exchange Offers and the Consent Solicitation—Conditions of the Exchange Offers.”
 
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Q:
WHY SHOULD I PARTICIPATE IN THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION?
A.
If you participate in the Exchange Offers and the Consent Solicitation, you can choose the Stock Option or Cash Option for your Preferred Stock. Each of the Consideration Options offers a premium to the last reported sales price of each series of Preferred Stock on July 17, 2020. While the Company may adjust the exact amount of your shares of Preferred Stock that would receive each Consideration Option, depending on the Consideration Option elected by each of the other participants in the Exchange Offers and the Consent Solicitation, you will have more control over the consideration you will receive for your Preferred Stock if you participate in the Exchange Offers and the Consent Solicitation. If you do not participate in the Exchange Offers and the Consent Solicitation and the Exchange Offers are consummated, you will receive the All Stock Remainder Consideration after the Exchange Offers closes, which will be delivered as soon as reasonably practical after, but no sooner than 11 business days after and no later than 180 calendar days after, the closing of each of the Exchange Offers. The 2.64 shares of Preferred Stock offered in the Stock Option represents a premium to the trading price each series of Preferred Stock as of July 17, 2020. The number of Shares of Common Stock that a Preferred Holder who does not elect to tender into the Exchange Offers will receive is less than the number of shares of Common Stock that a Preferred Holder who tenders into the Exchange Offers and elects to receive the Stock Option.
If the Preferred Holders do not participate and we are not able to complete the recapitalization, we may not be able to meet our financial obligations. This could result in a material adverse effect on the Company. If we are not able to complete the Exchange Offers and the Consent Solicitation and improve our near-term liquidity, we will consider other restructuring alternatives available to us at that time. Those alternatives may include, but are not limited to, (i) the transfer of certain of our assets to our lenders to fulfill our obligations, (ii) the sale of profitable assets, (iii) a corporate restructuring and recapitalization, which could include (a) a distribution or spin-off of profitable assets, (b) alternative offers to exchange our outstanding securities and debt obligations, (c) the incurrence of additional debt and (d) obtaining additional equity capital on terms that may be onerous or highly dilutive, (iv) joint ventures or (v) seeking relief through the commencement of a Chapter 11 proceeding or otherwise under the U.S. Bankruptcy Code, including (a) pursuing a plan of reorganization that we would seek to confirm (or “cram down”) despite any class of creditors who reject or are deemed to have rejected such plan, (b) seeking bankruptcy court approval for the sale of some, most or all of our assets pursuant to section 363(b) of the U.S. Bankruptcy Code and subsequent liquidation of the remaining assets in the bankruptcy case or (c) seeking another form of bankruptcy relief, all of which would involve uncertainties, potential delays and litigation risks.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. There can be no assurance that any such alternative will be pursued or accomplished. We may not be able to engage in any of these activities or engage in any of these activities on desirable terms, which could result in a default on our debt obligations. Any such alternative could be on terms that are less favorable to the Preferred Holders than the terms of the Exchange Offers and the Consent Solicitation, and Preferred Holders could receive little or no consideration for their shares of Preferred Stock. There are no restrictive covenants or other obligations under the Articles Supplementary for each series of Preferred Stock that limit the Company’s ability to complete a transfer, sale, distribution or spin-off of profitable assets. Moreover, in any such alternative there can be no assurance that Preferred Holders will be offered the right to exchange their Preferred Stock or would be entitled to a vote in respect of any such alternative.
Under our advisory agreement, a sale or disposition of hotels—for example, in sales, foreclosures or other dispositions—would constitute a “change of control” under our advisory agreement with our advisor Ashford Inc., enabling our advisor to terminate the advisory agreement, if such dispositions collectively constitute either (1) 20% of the gross book value of the Company’s assets in any calendar year or (2) 30% of the gross book value of the Company’s assets over any three-year period. In that event, we would be required to pay a termination fee equal to: (i) 1.1 multiplied by the greater of (a) 12 times the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; (b) the earnings multiple (calculated as our advisor’s total enterprise value on the trading day
 
7

 
immediately preceding the day the termination notice is given to our advisor divided by our advisor’s most recently reported adjusted EBITDA) for our advisor’s common stock for the 12 month period preceding the termination date of the advisory agreement multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; or (c) the simple average of the earnings multiples for each of the three fiscal years preceding the termination of the advisory agreement (calculated as our advisor’s total enterprise value on the last trading day of each of the three preceding fiscal years divided by, in each case, our advisor’s adjusted EBITDA for the same periods), multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; plus (ii) an additional amount such that the total net amount received by our advisor after the reduction by state and U.S. federal income taxes at an assumed combined rate of 40% on the sum of the amounts described in (i) and (ii) shall equal the amount described in (i). In the event we become obligated to pay the termination fee, it is very likely we will not have the financial resources to be able to do so. Moreover, our advisor is entitled to set off, take and apply any of our money on deposit in any of our bank, brokerage or similar accounts (all of which are controlled by, and in the name of, our advisor) to amounts we owe to advisor—including amounts we would owe to the advisor in respect of the termination fee, and in certain circumstances permits our advisor to escrow any money in such accounts into a termination fee escrow account (to which we would not have access) even prior to the time that the termination fee is payable.
For a more complete description of the risks relating to our failure to complete the Exchange Offers, see “Risk Factors—Risks Related to the Exchange Offers and the Consent Solicitation.”
Q:
DOES THE BOARD OF DIRECTORS RECOMMEND THAT I PARTICIPATE IN THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION?
A:
The Board of Directors has authorized and approved the Exchange Offers and the Consent Solicitation. None of the Board of Directors, our officers, the Information Agent, the Exchange Agent or any of our financial advisors is making a recommendation to any holder of Preferred Stock as to whether you should tender shares. You must make your own investment decision regarding the Exchange Offers and the Consent Solicitation based upon your own assessment of the market value of the Preferred Stock, the likely value of the Common Stock you may receive in the Exchange Offers and the Consent Solicitation, the effect of holding shares of Preferred Stock upon the approval of the Proposed Amendments, your liquidity needs, your investment objectives and any other factors you deem relevant.
Q:
HOW DO I PARTICIPATE IN THE EXCHANGE OFFERS?
A:
To tender your shares of Preferred Stock that are held through The Depository Trust Company (“DTC”) and consent to the Proposed Amendments, in the name of your broker, dealer, commercial bank, trust company or other nominee or custodian, and you wish to tender in the Exchange Offers, you should promptly contact the person in whose name your shares of Preferred Stock are held and instruct that person to tender your shares of Preferred Stock on your behalf. Preferred Holders should be aware that their broker, dealer, commercial bank, trust company or other nominee or custodian may establish their own earlier deadlines for participation in the Exchange Offers and Consent Solicitations. Accordingly, Preferred Holders wishing to participate in the Exchange Offers and Consent Solicitations should contact their broker, dealer, commercial bank, trust company or other nominee or custodian as soon as possible in order to determine the times by which such Preferred Holders must take action in order to participate in the Exchange Offers and Consent Solicitations. There is no letter of transmittal for the Exchange Offers. See “The Exchange Offers and the Consent Solicitation—Procedures for Tendering Shares.”
Q:
MAY I MAKE ONE ELECTION TO RECEIVE ONE CONSIDERATION OPTION FOR SOME OF MY SHARES OF PREFERRED STOCK AND ANOTHER ELECTION TO RECEIVE THE OTHER CONSIDERATION OPTION FOR OTHER SHARES?
A:
You may choose to receive one Consideration Option for your shares of one series of Preferred Stock and the other Consideration Option for your shares of another series of Preferred Stock. You may also choose to receive one Consideration Option for some of your shares of one series of Preferred Stock and the other Consideration Option for other shares of the same series of Preferred Stock. For example,
 
8

 
if you hold shares of both Series D Preferred Stock and Series F Preferred Stock, you can choose to receive the Stock Option for all of your shares of Series D Preferred Stock and the Cash Option for all of your shares of Series F Preferred Stock, and you can also elect the Stock Option for some of your shares of Series D Preferred Stock and the Cash Option for the remainder of your shares of Series D Preferred Stock.
If you otherwise properly tender your shares of Preferred Stock, but you do not elect either the Cash Option or the Stock Option, or you select both the Cash Option and the Stock Option, you will be deemed to have elected to receive the Stock Option.
Q:
CAN I TENDER ONLY SOME OF MY PREFERRED STOCK?
A:
You must validly tender all shares that you own in a series of Preferred Stock and deliver your consent to the Proposed Amendments in order to participate in the Exchange Offer for that series of Preferred Stock and the Consent Solicitation. No partial tenders within a series of Preferred Stock will be accepted.
If you own more than one series of Preferred Stock, you can tender all shares that you own in one series of Preferred Stock without tendering any of the shares that you own in another series of Preferred Stock.
Q:
WHEN AND HOW CAN I WITHDRAW TENDERED SHARES?
A:
Your tender of shares of Preferred Stock pursuant to the Exchange Offers and the Consent Solicitation is irrevocable, except that shares of Preferred Stock tendered pursuant to the Exchange Offers and the Consent Solicitation may be withdrawn at any time prior to the Expiration Date, and after [•], 2020 for any tendered shares of Preferred Stock not yet accepted for payments by that date.
For a withdrawal to be effective, your transmission notice of withdrawal of Preferred Stock must be effected prior to the Expiration Date by a properly transmitted “Request Message” through ATOP. Any such notice of withdrawal must (a) specify the name of the participant in DTC whose name appears on the security position listing as the owner of such shares of Preferred Stock, (b) include a statement that the holder is withdrawing its election to have its Preferred Stock exchanged and contain the description of the Preferred Stock to be withdrawn, (c) be signed by such participant in the same manner as the DTC participant’s name is listed in the applicable Agent’s Message.
See “The Exchange Offers and the Consent Solicitation—Withdrawal Rights.”
Q:
WHAT ARE THE CONDITIONS TO THE EXCHANGE OFFERS?
A:
Each Exchange Offer is subject to several conditions. The most significant conditions include:

the Individual Series Minimum Condition;

the Financing Condition;

approval of the issuance of shares of Common Stock in each of the Exchange Offers, which, in the aggregate, will constitute more than 20% of the outstanding shares of the Company’s Common Stock, by the holders of a majority of the outstanding Common Stock, as required by the rules of the NYSE;

approval of the Proposed Amendments by the holders of 66 2/3% of the outstanding Common Stock at the Special Meeting;

approval of the Proposed Amendments by the holders of 66 2/3% of the holders of the outstanding Common Stock at the Special Meeting; and

the effectiveness of the registration statement of which the Prospectus/Consent Solicitation is a part.
We will, subject to the rules and regulations of the SEC, in our reasonable judgment, determine whether any of the conditions to an Exchange Offer and the Consent Solicitation have been satisfied and whether to waive any conditions that have not been satisfied. See “The Exchange Offers and the Consent Solicitation—Conditions of the Exchange Offers,” “The Exchange Offers and the Consent
 
9

 
Solicitation—Extension, Termination and Amendment,” and “The Exchange Offers and the Consent Solicitation—Waiver of Conditions.”
Q:
CAN THE CONDITIONS TO THE EXCHANGE OFFERS BE WAIVED BY THE COMPANY?
A:
We reserve the right (but are not obligated), subject to the rules and regulations of the SEC, to waive on or before the Expiration Date any of the conditions of the Exchange Offers for any or all series of Preferred Stock, other than the condition regarding the effectiveness of the Registration Statement.
If any of the waivable conditions are not satisfied prior to the Expiration Date for any or all series of Preferred Stock, we may, subject to applicable law:

terminate the Exchange Offer and the Consent Solicitation for any or all series of Preferred Stock and return all shares of Preferred Stock to tendering holders;

extend the Exchange Offer and the Consent Solicitation for any or all series of Preferred Stock, and for some but not others, and retain all tendered Preferred Stock until the extended Expiration Date;

amend the terms of the Exchange Offer or Consent Solicitation for any or all series of Preferred Stock, and for some but not others, or modify the consideration to be paid by us pursuant to the Exchange Offers; or

waive the unsatisfied conditions with respect to the Exchange Offer and the Consent Solicitation for any or all series of Preferred Stock, and for some but not others, and accept all Preferred Stock tendered pursuant to the Exchange Offers and the Consent Solicitation.
If we elect to amend any of the material terms of any Exchange Offer or we elect to waive any unsatisfied conditions with regard to any Exchange Offer, we will extend the impacted Exchange Offer(s) and the Consent Solicitation for a period of at least five business days, or any different period of time, that we determine, in accordance with applicable law, depending upon the significance of the amendment, the manner of disclosure and the Expiration Date of the impacted Exchange Offer(s).
Q:
IF THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION ARE NOT SUCCESSFULLY COMPLETED, WHAT WILL BE THE CONSEQUENCES TO THE COMPANY?
A:
We believe that there will be significant adverse consequences to the Company if the Exchange Offers and the Consent Solicitation are not successfully completed. If the Preferred Holders do not participate and we are not able to complete the recapitalization, we may not be able to meet our financial obligations. This could result in a material adverse effect on the Company. If we are not able to complete the Exchange Offers and the Consent Solicitation and improve our near-term liquidity, we will consider other restructuring alternatives available to us at that time. Those alternatives may include, but are not limited to, (i) the transfer of certain of our assets to our lenders to fulfill our obligations, (ii) the sale of profitable assets, (iii) a corporate restructuring and recapitalization, which could include (a) a distribution or spin-off of profitable assets, (b) alternative offers to exchange our outstanding securities and debt obligations, (c) the incurrence of additional debt and (d) obtaining additional equity capital on terms that may be onerous or highly dilutive, (iv) joint ventures or (v) seeking relief through the commencement of a Chapter 11 proceeding or otherwise under the U.S. Bankruptcy Code, including (a) pursuing a plan of reorganization that we would seek to confirm (or “cram down”) despite any class of creditors who reject or are deemed to have rejected such plan, (b) seeking bankruptcy court approval for the sale of some, most or all of our assets pursuant to section 363(b) of the U.S. Bankruptcy Code and subsequent liquidation of the remaining assets in the bankruptcy case or (c) seeking another form of bankruptcy relief, all of which would involve uncertainties, potential delays and litigation risks.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. There can be no assurance that any such alternative will be pursued or accomplished. We may not be able to engage in any of these activities or engage in any of these activities on desirable terms, which could result in a default on our debt obligations. Any such alternative could be on terms that are less favorable to the Preferred Holders than the terms of the Exchange Offers and the Consent Solicitation, and Preferred Holders could receive little or no consideration for their shares of Preferred
 
10

 
Stock. There are no restrictive covenants or other obligations under the Articles Supplementary for each series of Preferred Stock that limit the Company’s ability to complete a transfer, sale, distribution or spin-off of profitable assets. Moreover, in any such alternative there can be no assurance that Preferred Holders will be offered the right to exchange their Preferred Stock or would be entitled to a vote in respect of any such alternative.
Under our advisory agreement, a sale or disposition of hotels—for example, in sales, foreclosures or other dispositions—would constitute a “change of control” under our advisory agreement with our advisor Ashford Inc., enabling our advisor to terminate the advisory agreement, if such dispositions collectively constitute either (1) 20% of the gross book value of the Company’s assets in any calendar year or (2) 30% of the gross book value of the Company’s assets over any three-year period. In that event, we would be required to pay a termination fee equal to: (i) 1.1 multiplied by the greater of (a) 12 times the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; (b) the earnings multiple (calculated as our advisor’s total enterprise value on the trading day immediately preceding the day the termination notice is given to our advisor divided by our advisor’s most recently reported adjusted EBITDA) for our advisor’s common stock for the 12 month period preceding the termination date of the advisory agreement multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; or (c) the simple average of the earnings multiples for each of the three fiscal years preceding the termination of the advisory agreement (calculated as our advisor’s total enterprise value on the last trading day of each of the three preceding fiscal years divided by, in each case, our advisor’s adjusted EBITDA for the same periods), multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; plus (ii) an additional amount such that the total net amount received by our advisor after the reduction by state and U.S. federal income taxes at an assumed combined rate of 40% on the sum of the amounts described in (i) and (ii) shall equal the amount described in (i). In the event we become obligated to pay the termination fee, it is very likely we will not have the financial resources to be able to do so. Moreover, our advisor is entitled to set off, take and apply any of our money on deposit in any of our bank, brokerage or similar accounts (all of which are controlled by, and in the name of, our advisor) to amounts we owe to advisor—including amounts we would owe to the advisor in respect of the termination fee, and in certain circumstances permits our advisor to escrow any money in such accounts into a termination fee escrow account (to which we would not have access) even prior to the time that the termination fee is payable.
For a more complete description of the risks relating to our failure to complete the Exchange Offers, see “Risk Factors—Risks Related to the Exchange Offers and the Consent Solicitation.”
Q:
IF I DECIDE TO TENDER MY SHARES OF PREFERRED STOCK, HOW WILL MY RIGHTS BE AFFECTED?
A:
If you decide to tender your shares of Preferred Stock and we complete the Exchange Offers and the Consent Solicitation, you will receive cash and/or shares of Common Stock. Any Shares of Common Stock that you receive will have different rights than those you currently have as a holder of Preferred Stock, including:

the Common Stock has no liquidation preference or preferred or cumulative dividend rights; and

the Common Stock is not convertible or redeemable by us.
See “The Exchange Offers and the Consent Solicitation—Terms of the Exchange Offers and the Consent Solicitation,” “Description of Capital Stock—Common Stock” and “Comparison of Rights Between the Preferred Stock and the Common Stock.”
Q:
WILL THE COMMON STOCK TO BE ISSUED IN THE EXCHANGE OFFERS BE FREELY TRADABLE?
A:
Yes, provided that you are not an affiliate of the Company and did not acquire your Preferred Stock from an affiliate of the Company.
 
11

 
Q:
DO I HAVE ANY APPRAISAL RIGHTS IN CONNECTION WITH THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION?
A:
No. You will not have appraisal rights, or any contract right to petition for fair value in connection with the Exchange Offers and the Consent Solicitation. We will not independently provide such a right. Under Section 3-202(a)(4) of the Maryland General Corporation Law (“MGCL”), stockholders generally have the right to petition for fair value when the charter is amended in a way that substantially affects the stockholders’ rights and alters the contract rights as expressly set forth in the charter. However, Section 3-202(a)(4) of the MGCL provides an exception from this general rule for situations where the charter reserves the power to amend the charter to alter contract rights, including amendments that substantially adversely affect stockholders’ rights. Article XI of our current Charter expressly reserves the power to amend the Charter to alter the contract rights of our existing stockholders, including alterations that are substantially adverse.
Q:
DO I HAVE TO DELIVER MY CONSENT IN THE CONSENT SOLICITATION IN ORDER TO VALIDLY TENDER MY SHARES OF PREFERRED STOCK IN THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION?
A:
Yes. You must consent to the Proposed Amendments in order to tender your shares of Preferred Stock in the Exchange Offers and the Consent Solicitation. Your participation in the Exchange Offers and the Consent Solicitation is conditioned on your execution of a written consent approving the Proposed Amendments, and our completion of the Exchange Offers and the Consent Solicitation is conditioned on obtaining consents from the requisite number of holders of each series of Preferred Stock to the Proposed Amendments. The Proposed Amendments must also be approved by the holders of 66 2/3% of the outstanding Common Stock at the Special Meeting, to effect the Proposed Amendments at the Special Meeting. Consent to the Proposed Amendments applicable to a series of Preferred Stock must be received from holders of at least 66 2/3% of the outstanding shares of that series of Preferred Stock for the Proposed Amendments to be effective and to effect the Exchange Offers.
There is no record date for the Exchange Offers and the Consent Solicitation, and the holders of 66 2/3% of the outstanding shares of each series of Preferred Stock as of the expiration date will be required to consent to the Proposed Amendments applicable to such series of Preferred Stock pursuant to the terms set forth herein. See “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions.”
Q:
WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSED AMENDMENTS?
A:
Under Maryland law and the Charter, we need the approval of the holders of 66 2/3% of the outstanding Common Stock at the Special Meeting, to effect the Proposed Amendments. We also need to obtain the consent to the Proposed Amendments of the holders of 66 2/3% of the outstanding shares of each series of Preferred Stock, with the holders of each series of Preferred Stock voting as a separate class, in order to effect each of the Proposed Amendments applicable to such series of Preferred Stock. The Preferred Holders will accomplish their consent to the Proposed Amendments by validly tendering (without later withdrawing) your shares of Preferred Stock. We are holding a Special Meeting to obtain the approval of the holders of our Common Stock.
See “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions.”
Q:
WHAT WILL HAPPEN IF THE REQUISITE CONSENTS TO THE PROPOSED AMENDMENTS FROM ONE OR MORE SERIES OF PREFERRED STOCK, BUT NOT ALL OF THE SERIES, ARE RECEIVED?
A:
In addition to the requirement for approval from holders of our Common Stock to effect the Proposed Amendments, we must obtain consent to the Proposed Amendments from holders of a series of Preferred Stock in order for us to complete the Exchange Offer and the Consent Solicitation for such series of Preferred Stock. If we receive the requisite consent from holders of one or more series of Preferred Stock but not all the series of Preferred Stock, we will complete the Exchange Offer and the
 
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Consent Solicitation for those series of Preferred Stock where the requisite consent has been received, and will not accept for exchange shares of any series of Preferred Stock where the requisite consent has not been received.
Q:
MAY I DELIVER A CONSENT TO ONLY SOME OF THE PROPOSED AMENDMENTS?
A:
No. You must consent to all of the Proposed Amendments affecting all of the classes of Preferred Stock that you wish to validly tender into the Exchange Offers. See “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions.”
Q:
HOW DO I DELIVER MY CONSENT TO THE PROPOSED AMENDMENTS?
A:
By validly tendering (without later withdrawing) your shares of Preferred Stock, you will also be consenting to all of the Proposed Amendments to the terms of each series of Preferred Stock tendered. If you hold your shares of Preferred Stock in street name (i.e., through a broker, dealer or other nominee), you should instruct your broker, dealer or other nominee to tender your shares of Preferred Stock and consent to the Proposed Amendments on your behalf.
See “The Exchange Offers and the Consent Solicitation—Effects of Tenders and Consents.”
Q:
WHEN WILL THE PROPOSED AMENDMENTS BECOME EFFECTIVE?
A:
If we receive the requisite consents of holders of each series of Preferred Stock and the requisite approval of the holders of Common Stock at the Special Meeting, the Proposed Amendments for each series for which approval is obtained will become effective upon the filing by the Company of Articles of Amendment with the SDAT or at a later date and time specified in the Articles of Amendment that is not more than 30 days after the acceptance for record of the Articles of Amendment by the SDAT. The Company intends to file the Articles of Amendment effecting the Amendment for each series for which approval is obtained promptly after the expiration of the Exchange Offer for the applicable series of Preferred Stock if (i) at least 66 2/3% of the outstanding shares of the applicable series of Preferred Stock have been tendered in the Exchange Offers and the Consent Solicitation and (ii) if the holders of at least 66 2/3% of the outstanding shares of Common Stock at the Special Meeting, to effect the Proposed Amendments have approved of the Proposed Amendments at the Special Meeting. The Board of Directors reserves the right not to make one or more of the Proposed Amendments, even if all Proposed Amendments are approved by our shareholders.
See “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions.”
Q:
WHO CAN I CONTACT WITH QUESTIONS ABOUT THE EXCHANGE OFFERS OR THE CONSENT SOLICITATION OR TO REQUEST ANOTHER COPY OF THE PROSPECTUS/CONSENT SOLICITATION?
A:
You can contact the Information Agent engaged for Exchange Offers and the Consent Solicitation at:
D.F. King & Co., Inc.
48 Wall Street, 22 Floor
New York, New York 10005
Banks and Brokers Call Collect: (212) 269-5550
All Others Call Toll-Free: (800) 967-4607
Email: aht@dfking.com
 
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THE EXCHANGE OFFERS AND THE CONSENT SOLICITATION SUMMARY
This summary highlights the material information contained in this Prospectus/Consent Solicitation, but may not include all of the information that you, as a holder of Preferred Stock, would like to know. To fully understand the Exchange Offers and the Consent Solicitation, and for a more complete description of the legal terms of the Exchange Offers and the Consent Solicitation, you should carefully read this entire document, including the other documents we refer to in this document.
The Company
Ashford Hospitality Trust, Inc.
The Address and Phone Number of the Company’s Principal Executive Offices
14185 Dallas Parkway, Suite 1100
Dallas, Texas 75254
(972) 490-9600
The Company’s Business
Ashford Hospitality Trust, Inc., together with its subsidiaries, is an externally-advised real estate investment trust (“REIT”). While our portfolio currently consists of upscale hotels and upper upscale full-service hotels, our investment strategy is predominantly focused on investing in upper upscale full-service hotels in the United States that have a revenue per available room (“RevPAR”) generally less than two times the U.S. national average. We were formed as a Maryland corporation in May 2003. We are advised by Ashford LLC, a subsidiary of Ashford Inc. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership (“Ashford Trust OP”), our operating partnership. Ashford OP General Partner LLC, a wholly owned subsidiary of the Company, serves as the sole general partner of our operating partnership. Our hotel properties are primarily branded under the widely recognized upscale and upper upscale brands of Marriott, Hilton, Hyatt and Intercontinental Hotel Group.
Preferred Stock Subject to the Exchange Offers and the Consent Solicitation
All outstanding shares of our Series D Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock and Series I Preferred Stock.
Exchange Offers
We are offering to exchange each outstanding share of the following series of Preferred Stock for, at the election of each holder, the Cash Option or Stock Option identified below.
Security
Cash Option
Per Share
Stock Option Per Share
Series D Preferred Stock
$9.75 in cash
2.64 shares of newly
issued Common Stock
Series F Preferred Stock
$9.75 in cash
2.64 shares of newly
issued Common Stock
Series G Preferred Stock
$9.75 in cash
2.64 shares of newly
issued Common Stock
Series H Preferred Stock
$9.75 in cash
2.64 shares of newly
issued Common Stock
Series I Preferred Stock
$9.75 in cash
2.64 shares of newly
issued Common Stock
 
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As set forth in the table below and described further in the paragraph that immediately follows, the Cash Option is subject to the following limitations:
Series of Preferred Stock
Maximum Aggregate
Cash Per Series
Maximum
Cash Shares
Series D Preferred Stock
$ 3,200,000 328,205
Series F Preferred Stock
$ 6,400,000 656,410
Series G Preferred Stock
$ 8,200,000 841,026
Series H Preferred Stock
$ 5,000,000 512,820
Series I Preferred Stock
$ 7,200,000 738,462
The Preferred Holders who elect the Cash Option will be subject to allocation and proration procedures intended to ensure that, within each series of Preferred Stock, no more than the Maximum Aggregate Cash Per Series will be issued to the Preferred Holders of that series of Preferred Stock. Proration will occur if the holders of Preferred Stock for each series tender more than the Maximum Cash Shares for that series and elect the Cash Option, in which case the amount of cash received by each Preferred Holder will be prorated among the number of shares validly tendered and not withdrawn according to a formula that takes into account the relative value of the Cash Option offered in each Exchange Offer. The Preferred Holder will instead receive share of Common Stock for the portion of the cash consideration that they did not receive.
Preferred Holders who validly tender their shares of Preferred Stock but do not elect either the Cash Option or the Stock Option for their applicable Series of Preferred Stock will be deemed to have elected to receive the Stock Option.
See “The Exchange Offers and the Consent Solicitation—General” and “The Exchange Offers and the Consent Solicitation—Exchange Offers Consideration Explanation and Examples.”
Common Stock Outstanding Before the Exchange Offers
As of July 17, 2020, the Company had 10,475,199 shares of Common Stock outstanding.
Common Stock Outstanding After the Exchange Offers
Assuming that 100% of the shares of Preferred Stock are accepted for exchange in the Exchange Offers and the holders thereof have elected the Stock Option, 59,635,998 shares of Common Stock would be issued in the Exchange Offers. Therefore, 70,111,197 shares of our Common Stock would be outstanding after completion of the Exchange Offers.
Outstanding Shares of Preferred Stock Prior to the Exchange Offers
Series D Preferred Stock: 2,389,393 shares
Series F Preferred Stock: 4,800,000 shares
Series G Preferred Stock: 6,200,000 shares
Series H Preferred Stock: 3,800,000 shares
Series I Preferred Stock: 5,400,000 shares
 
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Consent Solicitation
As part of the Exchange Offers, we are soliciting consent from the holders of each series of Preferred Stock to the Proposed Amendments. The Proposed Amendments must also be approved by the holders of 66 2/3% of the outstanding Common Stock at the Special Meeting, to effect the Proposed Amendments. Consent to the Proposed Amendments applicable to a series of Preferred Stock must be received from holders of at least 66 2/3% of the outstanding shares of that series of Preferred Stock for the Proposed Amendments to be effective and to effect the Exchange Offers. We are holding a Special Meeting to obtain the approval of the holders of our Common Stock to the Proposed Amendments, as well as to approve the issuance of shares of Common Stock in the Exchange Offers, as required by the rules of the NYSE.
The following is a summary of the Proposed Amendments and is qualified in its entirety by reference to the Charter and the amended text of the affected provisions of our Charter reflecting the Proposed Amendments, set forth in Annex A. The Proposed Amendments, if approved by our shareholders, would:
1.
automatically reclassify and convert each share of Series D Preferred Stock that remains outstanding after the Exchange Offer closes into the Series D All Stock Remainder Consideration and eliminate the description of the Series D Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock;
2.
automatically reclassify and convert each share of Series F Preferred Stock that remains outstanding after the Exchange Offer closes into the Series F All Stock Remainder Consideration and eliminate the description of the Series F Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock;
3.
automatically reclassify and convert each share of Series G Preferred Stock that remains outstanding after the Exchange Offer closes into the Series G All Stock Remainder Consideration and eliminate the description of the Series G Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock;
4.
automatically reclassify and convert each share of Series H Preferred Stock that remains outstanding after the Exchange Offer closes into the Series H All Stock Remainder Consideration and eliminate the description of the Series H Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock; and
5.
automatically reclassify and convert each share of Series I Preferred Stock that remains outstanding after the Exchange Offer closes into the Series I All Stock Remainder Consideration and eliminate the description of the Series I Preferred Stock from our Charter, restoring such shares to the status of undesignated shares of Preferred Stock.
 
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The All Stock Remainder Consideration will be paid as soon as reasonably practical after, but no sooner than 11 business days after and no later than 180 calendar days after, the closing of the Exchange Offers.
If the holders of 66 2/3% of the outstanding Common Stock at the Special Meeting have approved the Proposed Amendments at the Special Meeting, we will file Articles of Amendment with the SDAT to effect the Proposed Amendments related to a series of Preferred Stock promptly after the expiration of the Exchange Offer for such series of Preferred Stock if the holders of 66 2/3% of the outstanding shares of the series of Preferred Stock have been tendered.
For additional information regarding the Consent Solicitation, see “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions.” We urge you to review.
Reasons for the Exchange
Offers
The Exchange Offers are being conducted due to the impacts of COVID-19, in order to improve our capital structure and eliminate the Company’s large and growing financial obligation to its preferred stockholders, which the Company believes impedes the growth and strategic opportunities available to it.
Offer Consideration
The total consideration offered in the aggregate to all series of Preferred Stock is 59,635,998 newly issued shares of Common Stock and $30,000,000 in cash (the “Offer Consideration”). Regardless of the number of shares of Preferred Stock tendered for each Consideration Option, the Company will not issue more than 59,635,998 shares of Common Stock or pay out more than $30,000,000 in cash.
Trading and Related Matters
The Common Stock issuable pursuant to the Exchange Offers are being registered under the Securities Act of 1933, as amended, and will be freely tradable, except by our affiliates.
Differences in Rights of Our Common Stock and Preferred Stock
The Preferred Stock and Common Stock have different rights. For more information about these differences, see “The Exchange Offers and the Consent Solicitation—Differences in Rights of Our Common Stock and Preferred Stock.”
Market Price Information
On July 17, 2020, the last reported sales price of the Common Stock (after giving effect to the reverse stock split) was $6.93 per share, the last reported sales price of the Series D Preferred Stock was $7.05 per share, the last reported sales price of the Series F Preferred Stock was $6.55 per share, the last reported sales price of the Series G Preferred Stock was $6.69 per share, the last reported sales price of the Series H Preferred Stock was $6.45 per share and the last reported sales price of the Series I Preferred Stock was $6.50 per share.
Recapitalization
The Exchange Offers, together with the Proposed Amendments, are part of the Company’s plan of recapitalization to improve the Company’s capital structure in light of the impacts of COVID-19 on our business.
 
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Expiration Date
Each of the Exchange Offers and the Consent Solicitation will expire at 11:59 p.m., New York City time, on [•], 2020, unless extended or terminated by us, in which case the term “Expiration Date” with respect to any Exchange Offer means the latest time and date on which the Exchange Offer and the Consent Solicitation for such series of Preferred Stock, as so extended, expires.
Settlement Date
The settlement date in respect of Preferred Stock validly surrendered and accepted for exchange in the Exchange Offers will occur at closing of the Exchange Offers. We expect the closing to be within three business days after the Expiration Date.
How to Tender Preferred Stock for Exchange and Deliver Consents to the
Amendments
To tender your shares of Preferred Stock that are held through DTC, in the name of your broker, dealer, commercial bank, trust company or other nominee or custodian, and you wish to tender in the Exchange Offers, you should promptly contact the person in whose name your shares of Preferred Stock are held and instruct that person to tender your shares of Preferred Stock on your behalf. Preferred Holders should be aware that their broker, dealer, commercial bank, trust company or other nominee or custodian may establish their own earlier deadlines for participation in the Exchange Offers and Consent Solicitations. Accordingly, Preferred Holders wishing to participate in the Exchange Offers and Consent Solicitations should contact their broker, dealer, commercial bank, trust company or other nominee or custodian as soon as possible in order to determine the times by which such Preferred Holders must take action in order to participate in the Exchange Offers and Consent Solicitations. There is no letter of transmittal for the Exchange Offers. See “The Exchange Offers and the Consent Solicitation—Procedures for Tendering Shares.”
Fractional Shares
Fractional shares of our Common Stock will not be distributed in the Exchange Offers. Instead, you will receive cash in lieu of a fractional share. The Exchange Agent, acting as agent for the Preferred Holders who are otherwise entitled to receive a fractional share of our Common Stock, will aggregate all fractional shares that would otherwise have been required to be distributed and cause them to be sold in the open market for the accounts of those Preferred Holders. Any proceeds that the Exchange Agent realizes from the sale will be distributed, less any brokerage commissions or other fees, to each Preferred Holder entitled thereto in accordance with such Preferred Holders proportional interest in the aggregate number of shares sold. The distribution of fractional share proceeds may take longer than the distribution of shares of Elanco common stock. As a result, Preferred Holders may not receive fractional share proceeds at the same time they receive shares of our Common Stock pursuant to the Stock Option.
Partial Tenders
You must validly tender all shares that you own in a series of Preferred Stock and deliver your consent to the Proposed Amendments in order to participate in the Exchange Offer for that series of Preferred Stock and the Consent Solicitation. No partial tenders within a series of Preferred Stock will be accepted. If you own more than one series of Preferred Stock, you can tender all shares that you own in one series of Preferred Stock without tendering all of the shares that you own in another series of Preferred Stock.
 
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Withdrawal Rights
Your tender of shares of Preferred Stock pursuant to the Exchange Offers and the Consent Solicitation is irrevocable, except that shares of Preferred Stock tendered pursuant to the Exchange Offers and the Consent Solicitation may be withdrawn at any time prior to the Expiration Date, and after [•], 2020 for any tendered shares of Preferred Stock not yet accepted for payments by that date.
For a withdrawal to be effective, your transmission notice of withdrawal of Preferred Stock must be effected prior to the Expiration Date by a properly transmitted “Request Message” through ATOP. Any such notice of withdrawal must (a) specify the name of the participant in DTC whose name appears on the security position listing as the owner of such shares of Preferred Stock, (b) include a statement that the holder is withdrawing its election to have its Preferred Stock exchanged and contain the description of the Preferred Stock to be withdrawn, (c) be signed by such participant in the same manner as the DTC participant’s name is listed in the applicable Agent’s Message.
See “The Exchange Offers and the Consent Solicitation—Withdrawal Rights.”
Conditions Precedent to the Exchange Offers
Our obligation to accept shares for exchange in each Exchange Offer is conditioned upon, among other things:

the Individual Series Minimum Condition;

the Financing Condition;

approval of the issuance of shares of Common Stock in each of the Exchange Offers, which, in the aggregate, will constitute more than 20% of the outstanding shares of the Company’s Common Stock, by the holders of a majority of the Outstanding Common Stock, as required by the rules of the NYSE;

approval of the Proposed Amendments by the holders of 66% of the outstanding Common Stock at the Special Meeting;

approval of the Proposed Amendments by the holders of 6623% of the holders of the outstanding Common Stock at the Special Meeting; and

the effectiveness of the registration statement of which the Prospectus/Consent Solicitation is a part.
We will, subject to the rules and regulations of the SEC, in our reasonable judgment, determine whether any of the conditions to an Exchange Offer and the Consent Solicitation have been satisfied and whether to waive any conditions that have not been satisfied. See “The Exchange Offers and the Consent Solicitation—Conditions of the Exchange Offers,” “The Exchange Offers and the Consent Solicitation—Extension, Termination and Amendment,” and “The Exchange Offers and the Consent Solicitation—Waiver of Conditions.”
 
19

 
Consequences of Failure to Exchange Outstanding Preferred Stock
If the Exchange Offers for all or some of the Series of Preferred Stock close, all shares of Preferred Stock that are not tendered in the Exchange Offers that close will be automatically converted into the right to receive the All Stock Remainder Consideration applicable to that series of Preferred Stock. The All Stock Remainder Consideration will be delivered to the applicable non-tendering former Preferred Holders as soon as reasonably practical after, but no sooner than 11 business days after and no later than 180 calendar days after, the closing of the Exchange Offers. Each Exchange Offer will not be consummated unless, among other things, at least 66 2/3% of the Preferred Holders of such series of Preferred Stock participate in the Exchange Offer.
If holders of at least 66 2/3% of each series of Preferred Stock do not participate and the Company is not able to complete the Exchange Offers and the Consent Solicitation, there will be significant adverse consequences to the Company. If we are not able to complete the Exchange Offers and the Consent Solicitation and improve our near-term liquidity, we will consider other restructuring alternatives available to us at that time. Those alternatives may include, but are not limited to, (i) the transfer of certain of our assets to our lenders to fulfill our obligations, (ii) the sale of profitable assets, (iii) a corporate restructuring and recapitalization, which could include (a) a distribution or spin-off of profitable assets, (b) alternative offers to exchange our outstanding securities and debt obligations, (c) the incurrence of additional debt and (d) obtaining additional equity capital on terms that may be onerous or highly dilutive, (iv) joint ventures or (v) seeking relief through the commencement of a Chapter 11 proceeding or otherwise under the U.S. Bankruptcy Code, including (a) pursuing a plan of reorganization that we would seek to confirm (or “cram down”) despite any class of creditors who reject or are deemed to have rejected such plan, (b) seeking bankruptcy court approval for the sale of some, most or all of our assets pursuant to section 363(b) of the U.S. Bankruptcy Code and subsequent liquidation of the remaining assets in the bankruptcy case or (c) seeking another form of bankruptcy relief, all of which would involve uncertainties, potential delays and litigation risks.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. There can be no assurance that any such alternative will be pursued or accomplished. We may not be able to engage in any of these activities or engage in any of these activities on desirable terms, which could result in a default on our debt obligations. Any such alternative could be on terms that are less favorable to the Preferred Holders than the terms of the Exchange Offers and the Consent Solicitation, and Preferred Holders could receive little or no consideration for their shares of Preferred Stock. There are no restrictive covenants or other obligations under the Articles Supplementary for each series of Preferred Stock that limit the Company’s ability to complete a transfer, sale, distribution or spin-off of profitable assets. Moreover, in any such alternative there can be no assurance that Preferred Holders will be offered the right to exchange their Preferred Stock or would be entitled to a vote in respect of any such alternative.
Under our advisory agreement, a sale or disposition of hotels—for example, in sales, foreclosures or other dispositions—would
 
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constitute a “change of control” under our advisory agreement with our advisor Ashford Inc., enabling our advisor to terminate the advisory agreement, if such dispositions collectively constitute either (1) 20% of the gross book value of the Company’s assets in any calendar year or (2) 30% of the gross book value of the Company’s assets over any three-year period. In that event, we would be required to pay a termination fee equal to: (i) 1.1 multiplied by the greater of (a) 12 times the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; (b) the earnings multiple (calculated as our advisor’s total enterprise value on the trading day immediately preceding the day the termination notice is given to our advisor divided by our advisor’s most recently reported adjusted EBITDA) for our advisor’s common stock for the 12 month period preceding the termination date of the advisory agreement multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; or (c) the simple average of the earnings multiples for each of the three fiscal years preceding the termination of the advisory agreement (calculated as our advisor’s total enterprise value on the last trading day of each of the three preceding fiscal years divided by, in each case, our advisor’s adjusted EBITDA for the same periods), multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; plus (ii) an additional amount such that the total net amount received by our advisor after the reduction by state and U.S. federal income taxes at an assumed combined rate of 40% on the sum of the amounts described in (i) and (ii) shall equal the amount described in (i). In the event we become obligated to pay the termination fee, it is very likely we will not have the financial resources to be able to do so. Moreover, our advisor is entitled to set off, take and apply any of our money on deposit in any of our bank, brokerage or similar accounts (all of which are controlled by, and in the name of, our advisor) to amounts we owe to advisor—including amounts we would owe to the advisor in respect of the termination fee, and in certain circumstances permits our advisor to escrow any money in such accounts into a termination fee escrow account (to which we would not have access) even prior to the time that the termination fee is payable.
For a more complete description of the risks relating to our failure to complete the Exchange Offers, see “Risk Factors—Risks Related to the Exchange Offers and the Consent Solicitation.”
Material U.S. Federal Income Tax Considerations
Please see the section titled “Material U.S. Federal Income Tax Considerations” below. You are urged to consult your own tax advisors for a full understanding of the tax considerations of participating in the Exchange Offers in light of your own particular circumstances.
 
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Plans and Proposals
We expect to fund the Cash Options in the Exchange Offers with capital we raise by issuing or selling securities (that may be convertible into Common Stock) in a public or private offering, or by entering into an alternative capital raising transaction, which may include the potential issuance of convertible preferred debt, a potential real estate joint venture in which a third party would pay us cash for an interest in a to-be-formed joint venture holding some of our hotels or financing arrangements secured through government programs. The Exchange Offers are subject to the Financing Condition, including the determination of our Board of Directors that the proceeds of the Financing Transaction will be lawfully available to pay the Cash Options. If we are not able to satisfy the Financing Condition, we will not be required to close the Exchange Offers and accept tendered shares.
We do not otherwise, with exception of the Exchange Offers and the capital raising transactions described above, have any plans, proposals or negotiations that would result in any material change in our corporate structure or business. We do not have any plans, proposals or negotiations which would relate to or result in our Common Stock becoming eligible for termination of registration under Section 12(g)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Exchange Agent
Computershare Trust Company, N.A.
Transfer Agent
Computershare Trust Company, N.A.
Information Agent
D.F. King & Co., Inc.
Regulatory Approvals
We are not aware of any other material regulatory approvals necessary to complete the Exchange Offers, other than the obligation to file a Schedule TO/13E-3 with the SEC and to otherwise comply with applicable securities laws.
Appraisal Rights and Right to Petition for Fair Value
The Preferred Holders will not have appraisal rights, or any contract right to petition for fair value, in the Exchange Offers or Consent Solicitation. The Company will not independently provide such a right. Under Section 3-202(a)(4) of the MGCL, stockholders generally have the right to petition for fair value when the charter is amended in a way that substantially affects the stockholders’ rights and alters the contract rights as expressly set forth in the charter. However, Section 3-202(a)(4) of the MGCL provides an exception from this general rule for situations where the Charter reserves the power to amend the charter to alter contract rights, including amendments that substantially adversely affect stockholders’ rights. Article XI of our current Charter expressly reserves the power to amend the Charter to alter the contract rights of our existing stockholders, including alterations that are substantially adverse.
Retail Processing Fee
With respect to any tender in an amount up to [•] shares of Preferred Stock that is accepted in the Exchange Offers from any eligible soliciting dealer, we will pay to the relevant eligible soliciting dealer a Retail Processing Fee equal to [•]% of the principal amount of such shares of Preferred Stock validly tendered and accepted for purchase. In order to be eligible to receive the Retail Processing Fee, any soliciting dealer must properly complete a soliciting dealer form and deliver it to the Dealer Manager prior to the applicable
 
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Expiration Date. See “The Exchange Offers and the Consent Solicitation—Retail Processing Fee.”
Further Information
If you have questions regarding the Exchange Offers or the Consent Solicitation or the procedures for exchanging your Preferred Stock in the Exchange Offers, or if you require additional Exchange Offers materials, please contact:
D.F. King & Co., Inc.
48 Wall Street, 22 Floor
New York, New York 10005
Banks and Brokers Call Collect: (212) 269-5550
All Others Call Toll-Free: (800) 967-4607
Email: aht@dfking.com
 
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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following information reflects selected summary historical and unaudited pro forma financial information of the Company to give the effect of the Exchange Offers. The unaudited pro forma financial information is presented for illustrative purposes only and does not necessarily indicate the financial position or results that would have been realized had the Exchange Offers been completed as of the dates indicated. The selected unaudited pro forma financial information has been derived from, and should be read in conjunction with, our historical consolidated financial statements included in this prospectus.
Primary Assumptions
The primary assumptions made in preparing the unaudited pro forma information below are that our stockholders will approve amendments to the Charter to:

automatically reclassify and convert each share of Series D Preferred Stock that remains outstanding after the Exchange Offer closes into the Series D All Stock Remainder Consideration;

automatically reclassify and convert each share of Series F Preferred Stock that remains outstanding after the Exchange Offer closes into the Series F All Stock Remainder Consideration;

automatically reclassify and convert each share of Series G Preferred Stock that remains outstanding after the Exchange Offer closes into the Series G All Stock Remainder Consideration;

automatically reclassify and convert each share of Series H Preferred Stock that remains outstanding after the Exchange Offer closes into the Series H All Stock Remainder Consideration; and

automatically reclassify and convert each share of Series I Preferred Stock that remains outstanding after the Exchange Offer closes into the Series I All Stock Remainder Consideration.
The unaudited pro forma financial information has been adjusted resulting from the foregoing assumptions to:

increase common shares outstanding by 6,307,998 for the full exchange of the Series D Preferred Stock effective as of the date of its original issuance on July 17, 2007;

increase common shares outstanding by 12,672,000 for the full exchange of the Series F Preferred Stock effective as of the date of its original issuance on July 8, 2016;

increase common shares outstanding by 16,368,000 for the full exchange of the Series G Preferred Stock effective as of the date of its original issuance on October 17, 2016;

increase common shares outstanding by 10,032,000 for the full exchange of the Series H Preferred Stock effective as of the date of its original issuance on August 18, 2017;

increase common shares outstanding by 14,256,000 for the full exchange of the Series I Preferred Stock effective as of the date of its original issuance on November 13, 2017;

exclude the unpaid dividends on the Preferred Stock because the effect of the pro forma adjustments is to reflect that the Preferred Stock was not issued; and

reflect the effect of the 1-for-10 reverse stock split of our Common Stock completed on July 15, 2020.
 
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As of and for the Years Ended December 31,
2019
2018
2017
2016
2015
Summary Historical Financial Information:
Weighted average common shares outstanding-basic
9,983 9,728 9,520 9,442 9,629
Weighted average common shares outstanding-
dilutive
9,983 9,728 9,520 9,442 11,488
Book value per common share-basic
$ (29.65) $ (11.54) $ 7.12 $ 25.26 $ 43.33
Book value per common share-dilutive
(29.65) (11.54) 7.12 25.26 46.63
Dividends declared per common share
3.00 4.80 4.80 4.80 4.80
Income (loss) from continuing operations available to common stockholders per share-basic
(15.78) (17.52) (13.02) (9.49) 24.29
Income (loss) from continuing operations available to common stockholders per share-dilutive
(15.78) (17.52) (13.02) (9.49) 23.45
Summary Unaudited Pro Forma Historical Financial Information:
Weighted average common shares outstanding-basic
69,619 69,364 69,156 69,078 69,265
Weighted average common shares outstanding-
dilutive
69,619 69,364 69,156 69,078 71,124
Book value per common share-basic
$ 3.86 $ 6.52 $ 9.15 $ 11.46 $ 11.71
Book value per common share-dilutive
3.86 6.52 9.15 11.46 13.07
Dividends declared per common share
0.45 0.69 0.68 0.67 0.68
Income (loss) from continuing operations per share-basic
(2.01) (2.21) (1.27) (0.87) 4.32
Income (loss) from continuing operations per share-dilutive
(2.01) (2.21) (1.27) (0.87) 4.29
As of and for the Three
Months Ended March 31,
2020
2019
Summary Historical Financial Information:
Weighted average common shares outstanding-basic
10,047 9,940
Weighted average common shares outstanding-dilutive
10,047 9,940
Book value per common share-basic
$ (36.58) $ (19.38)
Book value per common share-dilutive
(36.58) (19.38)
Dividends declared per common share
1.20
Income (loss) from continuing operations available to common stockholders per share-basic
(9.40) (4.94)
Income (loss) from continuing operations available to common stockholders per share-dilutive
(9.40) (4.94)
Summary Unaudited Pro Forma Historical Financial Information:
Weighted average common shares outstanding-basic
69,683 69,576
Weighted average common shares outstanding-dilutive
69,683 69,576
Book value per common share-basic
$ 2.83 $ 5.35
Book value per common share-dilutive
2.83 5.35
Dividends declared per common share
0.18
Income (loss) from continuing operations per share-basic
(1.42) (0.66)
Income (loss) from continuing operations per share-dilutive
(1.42) (0.66)
 
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RISK FACTORS
In deciding whether to tender your shares of Preferred Stock pursuant to the Exchange Offers and the Consent Solicitation, you should read carefully this Prospectus/Consent Solicitation and the documents to which we refer you. You should also carefully consider the following factors.
Risks Related to Exchange Offers and the Consent Solicitation
The Exchange Offers may not benefit us or our stockholders.
The Exchange Offers may not enhance stockholder value or improve the liquidity and marketability of our Common Stock. As of July 17, 2020, there were 10,475,199 outstanding shares of Common Stock and 22,589,393 shares of Preferred Stock. This recapitalization will significantly increase the number of outstanding shares of Common Stock. If all of the outstanding Common Stock available for issuance under the Exchange Offers are issued, there will be approximately 70,111,197 shares of Common Stock outstanding.
As a result, the Exchange Offers may result in an immediate decrease in the market value of the Common Stock. In addition, factors unrelated to our stock or our business, such as the general perception of the Exchange Offers and the Consent Solicitation by the investment community, may cause a decrease in the value of the Common Stock and impair its liquidity and marketability. Prior performance of the Common Stock may not be indicative of the performance of the Common Stock after the Exchange Offers. Furthermore, securities markets worldwide have experienced significant price and volume fluctuations over the last several years. This market volatility, as well as general economic, market or political conditions, could cause a reduction in the market price and liquidity of the Common Stock following the Exchange Offers and the Consent Solicitation, particularly if the Exchange Offers and the Consent Solicitation are not viewed favorably by the investment community.
If we are unable to consummate the Exchange Offers and the Consent Solicitation, we will consider other restructuring alternatives available to us at that time, which could adversely affect our business and financial position.
If we are not able to complete the Exchange Offers and the Consent Solicitation and improve our near-term liquidity, we will consider other restructuring alternatives available to us at that time. Those alternatives may include, but are not limited to, (i) the transfer of certain of our assets to our lenders to fulfill our obligations, (ii) the sale of profitable assets, (iii) a corporate restructuring and recapitalization, which could include (a) a distribution or spin-off of profitable assets, (b) alternative offers to exchange our outstanding securities and debt obligations, (c) the incurrence of additional debt and (d) obtaining additional equity capital on terms that may be onerous or highly dilutive, (iv) joint ventures or (v) seeking relief through the commencement of a Chapter 11 proceeding or otherwise under the U.S. Bankruptcy Code, including (a) pursuing a plan of reorganization that we would seek to confirm (or “cram down”) despite any class of creditors who reject or are deemed to have rejected such plan, (b) seeking bankruptcy court approval for the sale of some, most or all of our assets pursuant to section 363(b) of the U.S. Bankruptcy Code and subsequent liquidation of the remaining assets in the bankruptcy case or (c) seeking another form of bankruptcy relief, all of which would involve uncertainties, potential delays and litigation risks.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. There can be no assurance that any such alternative will be pursued or accomplished. We may not be able to engage in any of these activities or engage in any of these activities on desirable terms, which could result in a default on our debt obligations.
Under our advisory agreement, a sale or disposition of hotels—for example, in sales, foreclosures or other dispositions—would constitute a “change of control” under our advisory agreement with our advisor Ashford Inc., enabling our advisor to terminate the advisory agreement, if such dispositions collectively constitute either (1) 20% of the gross book value of the Company’s assets in any calendar year or (2) 30% of the gross book value of the Company’s assets over any three-year period. In that event, we would be required to pay a termination fee equal to: (i) 1.1 multiplied by the greater of (a) 12 times the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; (b) the earnings multiple (calculated as our advisor’s total enterprise value on the trading day immediately preceding
 
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the day the termination notice is given to our advisor divided by our advisor’s most recently reported adjusted EBITDA) for our advisor’s common stock for the 12 month period preceding the termination date of the advisory agreement multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; or (c) the simple average of the earnings multiples for each of the three fiscal years preceding the termination of the advisory agreement (calculated as our advisor’s total enterprise value on the last trading day of each of the three preceding fiscal years divided by, in each case, our advisor’s adjusted EBITDA for the same periods), multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; plus (ii) an additional amount such that the total net amount received by our advisor after the reduction by state and U.S. federal income taxes at an assumed combined rate of 40% on the sum of the amounts described in (i) and (ii) shall equal the amount described in (i). In the event we become obligated to pay the termination fee, it is very likely we will not have the financial resources to be able to do so. Moreover, our advisor is entitled to set off, take and apply any of our money on deposit in any of our bank, brokerage or similar accounts (all of which are controlled by, and in the name of, our advisor) to amounts we owe to advisor—including amounts we would owe to the advisor in respect of the termination fee, and in certain circumstances permits our advisor to escrow any money in such accounts into a termination fee escrow account (to which we would not have access) even prior to the time that the termination fee is payable.
If a protracted and non-orderly restructuring or reorganization were to occur, there is a risk that the ability of the Preferred Holders to recover their investments would be substantially delayed and more impaired than under the proposed Exchange Offers. Any alternative we pursue, whether in or out of court, may take substantially longer to consummate than the Exchange Offers and the Consent Solicitation. A protracted financial restructuring could disrupt our business and would divert the attention of our management from the operation of our business and implementation of our business plan. It is possible that such a prolonged financial restructuring or bankruptcy proceeding would cause us to lose many of our key officers. Such losses of key officers would likely make it difficult for us to complete a financial restructuring and may make it less likely that we will be able to continue as a viable business.
The uncertainty surrounding a prolonged financial restructuring could also have other adverse effects on us. For example, it could also adversely affect:

our ability to raise additional capital;

our ability to capitalize on business opportunities and react to competitive pressures;

our ability to attract and retain employees;

our liquidity;

how our business is viewed by investors, lenders, strategic partners or customers; and

our enterprise value.
Any alternative restructuring could be on terms less favorable to the Preferred Holders than the terms of the Exchange Offers and the Consent Solicitation.
Any alternative restructuring that we may pursue in the event that the Exchange Offers are not completed could be on terms that are less favorable to the Preferred Holders than the terms of the Exchange Offers and the Consent Solicitation, and Preferred Holders could receive little or no consideration for their shares of Preferred Stock. In the event that one or more of the Exchange Offers are not completed, the Preferred Holders for such series of Preferred Stock will retain their existing rights, including their liquidation and dividend rights, there is no assurance that the Preferred Holders will receive the value associated with those rights in one or more of alternative restructuring options that the Company will pursue in the event that the Exchange Offers are not completed. There are no restrictive covenants or other obligations under the Articles Supplementary for each series of Preferred Stock that limit the Company’s ability to complete a transfer, sale, distribution or spin-off of profitable assets. Moreover, in any such alternative there can be no assurance that Preferred Holders will be offered the right to exchange their Preferred Stock or would be entitled to a vote in respect of any such alternative.
 
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The Preferred Holders who elect to tender their shares of Preferred Stock for the Cash Option may not receive Offer Consideration in the form elected.
A Preferred Holder who tenders his, her or its Preferred Stock is not guaranteed to receive the Consideration Option elected for each of the Preferred Holders’ shares of Preferred Stock. The total amount of cash available for all series of Preferred Stock is $30,000,000. Therefore, if the number of Preferred Holders who select the Cash Option would result (but for the proration described in this sentence) in more than $30,000,000 being required to be paid by us, then the payment will be subject to allocation and proration procedures intended to ensure that, in the aggregate, across all series of Preferred Stock, no more than $30,000,000 in cash in the aggregate will be issued to Preferred Holders who validly tender and do not withdraw their shares of Preferred Stock. If the total Offer Consideration owed to Preferred Holders who elect the Cash Option is greater than $30,000,000, which would occur if the holders of Preferred Stock for each series tender more than the Maximum Cash Shares for that series and elect the Cash Option, then the amount of cash received by each Preferred Holders will be prorated among the number of shares of Preferred Stock validly tendered and not withdrawn according to a formula that takes into account the relative value of the Cash Option offered in each Exchange Offer. The Preferred Holder will instead receive shares of Common Stock for the portion of the cash consideration that they did not receive. Accordingly, some of the consideration a Preferred Holder receives in the Exchange Offers may differ from the type of consideration selected and such difference may be significant.
If completion of our Exchange Offers does not qualify as a reorganization under the Internal Revenue Code of 1986, as amended (the “Code”), you may be taxed on the full amount of the consideration you receive from us.
We believe that the exchange of Common Stock and cash, if any, for all of a holder’s Preferred Stock pursuant to the Exchange Offers should be treated for U.S. federal income tax purposes as a recapitalization within the meaning of Section 368 of the Code. In such case, Preferred Holders who participate in the Exchange Offers will generally not recognize gain or loss other than to the extent they receive cash in the Exchange Offers. The U.S. federal income tax treatment described above, however, is not free from doubt. If we complete our Exchange Offers in a manner in which the Exchange Offers does not qualify for the U.S. federal income tax treatment described above, you may be taxed on any gain you realize up to the full Offer Consideration.
We may choose to waive any of the conditions of the Exchange Offers that we are permitted by law to waive.
The consummation of the Exchange Offer for each series of Preferred Stock is subject to, and conditioned upon, the satisfaction or waiver of the conditions discussed under “The Exchange Offers and the Consent Solicitation—Conditions of the Exchange Offers”. These conditions are for our sole benefit and may be asserted by us with respect to all or any portion of the Exchange Offers regardless of the circumstances, including any action or inaction by us, giving rise to the condition. These conditions may be waived by us in whole or in part at any time or from time to time in our sole discretion, in accordance with law. Accordingly, we may elect to waive certain conditions to allow an Exchange Offer to close, notwithstanding the fact that one or more condition may not have been satisfied.
The Exchange Offers may be terminated, cancelled or delayed.
We reserve the right, notwithstanding the satisfaction of these conditions, to terminate or amend the Exchange Offers. Even if any or all of the Exchange Offers are completed, each of the Exchange Offers may not be completed on the schedule described in this prospectus. The Exchange Offers may be delayed by a waiver of any of the conditions of the Exchange Offers. Accordingly, Preferred Holders participating in the Exchange Offer may have to wait longer than expected to receive their consideration.
Preferred Holders who elect to tender their shares of Preferred Stock for the Cash Option may not receive the Cash Option if the Exchange Offer for their series of Preferred Stock remains open after one or more Exchange Offers for the other series of Preferred Stock closes.
We may elect to close one or more Exchange Offers while one or more other Exchange Offers remain open. All of the conditions precedent to one or more Exchange Offers may be satisfied or waived by us
 
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before the conditions precedent to other Exchange Offers are satisfied. In this case, Preferred Holders who elect the Cash Option in the Exchange Offers that close will be entitled to receive, in the aggregate, the total Cash Consideration for all of the Exchange Offers, subject to the proration and allocation procedures described herein, while holders who elect the Cash Option and have tendered their shares in an Exchange Offer that has not closed will not be entitled to receive the Cash Option and instead will receive the Stock Option.
One or more of the Exchange Offers may not be consummated and therefore shares of one or more of our series of Preferred Stock may remain outstanding and continue to have dividend and liquidation rights that are senior to our Common Stock.
Each of the Exchange Offers is subject to conditions that may or may not be satisfied or waived. Therefore, it is possible that some of the Exchange Offers may be consummated while others may not. If one or more of the Exchange Offers does not close, shares of our Preferred Stock will remain outstanding. Holders of our Preferred Stock have certain rights that holders of our Common Stock do not. These include rights to dividends in priority to dividends on our Common Stock and a right to receive, upon a liquidation of our company, a preference amount out of the assets available for distribution to stockholders before any distribution can be made to holders of our Common Stock. If we were to file for bankruptcy, holders of our shares of Preferred Stock that remain outstanding would have a claim in bankruptcy that is senior to any claim holders of our Common Stock would have. In addition, if shares of our Preferred Stock remain outstanding after one or more of the Exchange Offers close, we may determine in the future to offer to exchange or repurchase shares of our then outstanding Preferred Stock on terms that are more favorable than the terms of the Exchange Offers.
Tendering stockholders may be required to return their consideration if a court were to determine that the Exchange Offers constituted a fraudulent transfer under federal or state laws or, with respect to the Cash Consideration, an unlawful distribution under the MGCL.
A payment or transfer of property can subsequently be voided if a court finds that the payment or transfer constituted a “fraudulent” transfer. There are generally two standards used by courts to determine whether a transfer was fraudulent under federal or state law.

First, a transfer will be deemed fraudulent if it was made with the actual intent to hinder, delay or defraud current or future creditors.

Second, a transfer will be considered fraudulent if the transferor received less than reasonably equivalent value in exchange for the payment or transfer of property and either (a) was insolvent at the time of the transaction, (b) was rendered insolvent as a result of the transaction, (c) was engaged, or about to engage, in a business or transaction for which its assets were unreasonably small, or (d) intended to incur, or believed, or should have believed, it would incur, debts beyond its ability to pay as such debts mature.
Litigation seeking to void the Exchange Offers as fraudulent transfers would have to be commenced by our creditors or someone acting on their behalf, such as a bankruptcy trustee. If such litigation is instituted, we cannot assure you as to what standard a court would apply in order to determine whether we were “insolvent” as of the date the Exchange Offers was closed, or that a court would not determine that we were insolvent on the date of closing of the Exchange Offers. We can also not assure you that a court would not determine that the Exchange Offers constituted fraudulent transfers on another ground.
The definition of “insolvent” varies under three potentially applicable statutes. The measure of insolvency for purposes of the foregoing will vary depending upon the law of the jurisdiction which is being applied. Under the Bankruptcy Code, we would be considered insolvent if the sum of all our liabilities is greater than the value of all our property at a fair valuation. The foregoing standards are applied on a case-by-case basis to determine the insolvency of a particular person. Because there can be no assurance which jurisdiction’s fraudulent transfer law would be applied by a court, there can be no assurance as to what standard a court would apply in order to determine insolvency.
If a court determines the Exchange Offers constituted fraudulent transfers, the Exchange Offers could be voided. If the Exchange Offers are deemed a fraudulent transfer, holders of the Preferred Stock that
 
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successfully tender their shares may be required to return the consideration received for their Preferred Stock, and such holders would be returned to their original position as a holder of Preferred Stock.
Under the MGCL, the payment of the Cash Option would be considered an unlawful distribution if, as of the date the cash consideration is transferred to the tendering Preferred Holders and after giving effect to the payment, the Company would not be able to pay its indebtedness as such indebtedness becomes due in the usual course of the business or its liabilities would exceed its assets.
The aggregate value participants in the Exchange Offers and Consent Solicitation receive may be lower than the value of their Preferred Stock.
The sum of the market price value of the Common Stock and the cash being offered per share of Preferred Stock in the Exchange Offers and the Consent Solicitation is lower than the liquidation preference per share of the Preferred Stock. The shares of Preferred Stock have a liquidation preference of $25 per share plus any unpaid dividends on such share. The holders of the Series D Preferred Stock are being offered $9.75 in cash or 2.64 shares of Common Stock, the holders of the Series F Preferred Stock are being offered $9.75 in cash or 2.64 shares of Common Stock, the holders of the Series G Preferred Stock are being offered $9.75 in cash or 2.64 shares of Common Stock, the holders of the Series H Preferred Stock are being offered $9.75 in cash or 2.64 shares of Common Stock and the holders of the Series I Preferred Stock are being offered $9.75 in cash or 2.64 shares of Common Stock, for each share of that series of Preferred Stock in the Exchange Offers and the Consent Solicitation. During the last 20 trading days, the Common Stock has traded in a range of $5.55 to $7.10 per share (adjusted to reflect the 1-for-10 reverse stock split completed on July 15, 2020). As a result, the aggregate value of the consideration per share in the Exchange Offers and the Consent Solicitation is lower than the liquidation preference per share of the Preferred Stock, including the amount of any unpaid dividends on the Preferred Stock. Further, no additional consideration is being offered in respect of unpaid dividends on the Preferred Stock that will be eliminated if the Proposed Amendments are adopted.
The trading price of our Common Stock may be subject to significant fluctuations and volatility.
The stock markets have experienced high levels of volatility. These market fluctuations may adversely affect the trading price of our Common Stock. In addition, the trading price of our Common Stock has been subject to significant fluctuations and may continue to fluctuate or decline. Factors that could cause fluctuations in the trading price of our Common Stock include the following:

changes in the business, operations or prospects of the Company;

actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

catastrophic events, both natural and man-made;

governmental litigation and/or regulatory developments or considerations;

general market and economic conditions or market and economic conditions affecting our industry generally;

publication of unfavorable research reports about us or our industry or withdrawal of research reports by research analysts;

the departure of key personnel;

market assessments of the Financing Transaction and the likelihood of us returning to normalized business operations;

market assessments as to whether and when the Exchange Offers and the Consent Solicitation will be consummated and market assessments of the condition, results or prospects of our business; and

governmental actions or legislative developments affecting the mortgage industry generally.
Holders are urged to obtain market quotations for our Common Stock when they consider the Exchange Offers and the Consent Solicitation.
 
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We have not obtained a third-party determination that the Exchange Offers and the Consent Solicitation is fair to holders of Preferred Stock.
We are not making a recommendation as to whether holders of Preferred Stock should exchange their shares in the Exchange Offers and the Consent Solicitation. We have not retained, and do not intend to retain, any unaffiliated representative to act solely on behalf of the holders of Preferred Stock for purposes of negotiating the Exchange Offers and the Consent Solicitation or preparing a report concerning the fairness of the Exchange Offers and the Consent Solicitation. The value of the cash and Common Stock to be issued in the Exchange Offers and the Consent Solicitation may not equal or exceed the value of the Preferred Stock tendered. You must make your own independent decision regarding your participation in the Exchange Offers and the Consent Solicitation.
The Proposed Amendments will eliminate all rights of the holders of Preferred Stock, and all unexchanged shares of Preferred Stock will be automatically converted into the right to receive the All Stock Remainder Consideration upon the Proposed Amendments becoming effective.
If we complete the Exchange Offers and the Consent Solicitation and obtain the requisite approvals of the Proposed Amendments by holders of each series of our Preferred Stock, each voting as a separate class, and the Proposed Amendments become effective, all rights of holders of Preferred Stock that are currently set forth in the Charter will be eliminated. Furthermore, if we complete the Exchange Offers and Consent Solicitations, all unexchanged shares of Preferred Stock will be automatically converted into the right to receive the All Stock Remainder Consideration upon the Proposed Amendments becoming effective. See “The Exchange Offers and the Consent Solicitation—Consent Solicitation Provisions” for a description of the Proposed Amendments and Annex A for the complete text of the Proposed Amendments. The All Stock Remainder Consideration for each series of Preferred Stock includes a substantially lower number of shares of our Common Stock than the Stock Option for each series of Preferred Stock. As a result, if we complete the Exchange Offers and Consent Solicitations, Preferred Holders who do not tender their shares into the Exchange Offers will receive substantially less Common Stock than they would have had they participated and elected to receive the Stock Option.
If the Exchange Offers are consummated, Preferred Holders who do not tender into the Exchange Offers will receive the All Stock Remainder Consideration, which is priced at a discount to the Consideration Options, and will no longer have rights as a Preferred Holder.
If the Exchange Offers are consummated and the Proposed Amendments are approved, all unexchanged shares of Preferred Stock will be automatically converted into the right to receive the All Stock Remainder Consideration and former Preferred Holders will no longer have rights as a Preferred Holder. All Preferred Holders who tender their shares into the Exchange Offers and select the Stock Option will receive 2.64 shares of Common Stock per share, whereas holders who choose not to tender into the Exchange Offers would only receive 1.02 shares of Common Stock for each share of Preferred Stock they hold upon the automatic conversion of their shares of Preferred Stock.
Risks Related to Our Business
A financial crisis, economic slowdown, or epidemic or other economically disruptive event may harm the operating performance of the hotel industry generally. If such events occur, we 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. gross domestic product. A majority of our hotels are classified as upscale and upper 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 upscale and upper upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties or concerns with respect to communicable disease, business and leisure travelers may seek to reduce travel costs and/or health risks by limiting travel or seeking to reduce costs on their trips. Any economic recession will likely have an adverse effect on us.
 
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The hotel industry is highly competitive and the hotels in which we invest are subject to competition from other hotels for guests.
The hotel business is highly competitive. Our hotel properties will compete on the basis of location, brand, room rates, quality, amenities, reputation and reservations systems, among many factors. There are many competitors in the hotel industry, 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, profitability is negatively affected by the fixed costs of operating hotels. We also face competition from services such as home sharing companies and apartment operators offering short-term rentals.
As a result of the impact of the COVID-19 pandemic, our financial statements contain a statement regarding a substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements included herein have been prepared on a going concern basis, which assumes that we will continue to operate in the normal course of business. As a result of the factors described below under “The outbreak of COVID-19 has and will continue to significantly impact our occupancy rates and RevPAR,” our notes to our financial statements include a qualification as to a substantial doubt about our ability to continue as a going concern over the next twelve months. As a result of the continued suspension of operations at some of our hotels and the severe decline in revenues resulting from the COVID-19 pandemic, beginning on April 1, 2020, we did not make principal or interest payments under nearly all of our loan agreements, which constituted an “Event of Default” as such term is defined under the applicable loan agreement. Additionally, the lenders who hold the notes that are secured by the Embassy Suites New York Manhattan Times Square and Hilton Scotts Valley hotel in Santa Cruz, California have each sent us an acceleration notice, which accelerated all payments due under the applicable loan documents. In addition, the lender for the W Hotel in Minneapolis, Minnesota and the lender for our Rockbridge Portfolio, which is an eight hotel portfolio, have each sent to us a notice of UCC sale, which provides that the respective lender will sell the subsidiaries of the Company that own the respective hotels in a public auction. At this time, we are currently in the process of negotiating forbearance agreements with our lenders. Any forbearance agreement may lead to increased costs, increased interest rates, additional restrictive covenants and other lender protections and there can be no assurance that we will be successful in modifying such terms. If we are unsuccessful in negotiating forbearance agreements with our lenders, this could lead to the potential acceleration of amounts due under our loan agreements, which would adversely affect our financial condition and liquidity. The foregoing raises substantial doubt about our ability to continue as a going concern. The substantial doubt about our ability to continue as a going concern may negatively affect the price of our preferred or Common Stock and may make it challenging for us to issue additional debt on favorable terms to the extent necessary or desirable to increase our liquidity.
We did not pay dividends on our Preferred Stock in the second quarter of 2020 and do not expect to pay dividends on our Preferred Stock for the foreseeable future.
We did not pay dividends on the Preferred Stock in the second quarter of 2020, and we do not expect to pay dividends on our Preferred Stock for the foreseeable future, particularly in light of the downturn in our business occasioned by the COVID-19 pandemic and the demands of our property-level lenders, with whom we are currently negotiating forbearance agreements in light of our failure to make interest and principal payments starting in April 2020. Our Board of Directors decides each quarter whether to pay dividends on our preferred stock, based on a variety of factors.
We may become no longer eligible to use Form S-3, which would impair our capital raising activities.
We may become no longer eligible to use Form S-3 as a result of our recent payment defaults under our mortgage loans with our property level lenders, which occurred beginning on April 1, 2020, and our failure to pay dividends to our holders of Preferred Stock during the second quarter of 2020. If such defaults are not cured by December 31, 2020, we will not be able to use our currently effective Form S-3 to register sales of our securities. In addition, we are currently restricted from filing new shelf registration statements on Form S-3 or filing a post-effective amendment to an existing Form S-3 as a result of our payment defaults.
 
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Our existing shelf registration statement on Form S-3 is set to expire September 28, 2020. We have relied on shelf registration statements on Form S-3 for our financings in recent years, and accordingly any such limitations may harm our ability to raise the capital we need. Under these circumstances, if we become ineligible to use our existing Form S-3 again, we will be required to use a registration statement on Form S-11 to register securities with the SEC, which would hinder our ability to act quickly in raising capital to take advantage of market conditions in our capital raising activities and would increase our cost of raising capital.
We have received a notice of non-compliance with a continued listing standard from the NYSE for our Common Stock. If we are unable to avoid the delisting of our Common Stock from the NYSE, it could have a substantial effect on our liquidity and results of operations.
On April 17, 2020, we received written notification from the NYSE that the average closing price of our Common Stock over the prior 30 consecutive trading-day period was below $1.00 per share, which is the minimum average closing price per share required to maintain listing on the NYSE under Section 802.01C of the NYSE Listed Company Manual. We informed the NYSE that we intend to cure the deficiency and to return to compliance with the NYSE continued listing requirements, which they acknowledged. We can regain compliance at any time during the cure period following receipt of the notification if our Common Stock has a closing share price of at least $1.00 on the last trading day of any calendar month during the cure period and also has an average closing share price of at least $1.00 over the 30-trading day period ending on the last trading day of that month. In addition, on April 23, 2020, we received notification from the NYSE that, as a result of a temporary relief order in connection with the COVID-19 pandemic, ongoing cure periods for listed companies would be tolled until June 30, 2020. As a result, the effective end date of the cure period applicable to us will be December 26, 2020.
Under NYSE rules, a company can avoid delisting if, during the six month period following receipt of the NYSE notice and on the last trading day of any calendar month, a company’s common stock price per share and 30 trading-day average share price is at least $1.00. During this six month period, a company’s common stock will continue to be traded on the NYSE, subject to compliance with other continued listing requirements. On July 15, 2020, we completed a 1-for-10 reverse stock split of our Common Stock, which was completed with the intention to cure the deficiency. There can be no assurance that we will be successful in regaining compliance with this continued listing standard, or that we will remain in compliance if we are successful.
Our Common Stock could also be delisted if (i) our average market capitalization over a consecutive 30 trading-day period is less than $15 million, or (ii) our Common Stock trades at an “abnormally low” price. In either case, our Common Stock would be suspended from trading on the NYSE immediately, and the NYSE would begin the process to delist our Common Stock, subject to our right to appeal under NYSE rules. If this were to occur, there is no assurance that any appeal we undertake in these or other circumstances would be successful, nor is there any assurance that we will remain in compliance with the other NYSE continued listing standards.
Failure to maintain our NYSE listing could negatively impact us and our stockholders by reducing the willingness of investors to hold our Common Stock because of the resulting decreased price, liquidity and trading volume of our Common Stock, limited availability of price quotations, and reduced news and analyst coverage. These developments may also require brokers trading in our Common Stock to adhere to more stringent rules and may limit our ability to raise capital by issuing additional shares in the future. Delisting may adversely impact the perception of our financial condition and cause reputational harm with investors and parties conducting business with us. In addition, the perceived decreased value of equity incentive awards may reduce their effectiveness in encouraging executive performance and retention.
Because we depend upon our advisor and its affiliates to conduct our operations, any adverse changes in the financial condition of our advisor or its affiliates or our relationship with them could hinder our operating performance.
We depend on our advisor or its affiliates to manage our assets and operations. Any adverse changes in the financial condition of our advisor or its affiliates or our relationship with them could hinder their ability to manage us and our operations successfully.
 
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We depend on our advisor’s key personnel with longstanding business relationships. The loss of our 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 our advisor’s management team and the extent and nature of the relationships they have developed with hotel franchisors, operators, and owners and hotel lending and other financial institutions. The loss of services of one or more members of our advisor’s management team could harm our business and our prospects.
We do not have any employees, and rely on our hotel managers to employ the personnel required to operate the hotels we own. As a result, we have less ability in the COVID-19 environment to reduce staffing at our hotels than we would if we employed such personnel directly.
We do not have any employees. We contractually engage hotel managers, such as Marriott, Hilton, Hyatt and our affiliate, Remington Hotels, which is owned by Ashford Inc., to operate, and to employ the personnel required to operate, our hotels. The hotel manager is required under the applicable hotel management agreement to determine appropriate staffing levels; we are required to reimburse the applicable hotel manager for the cost of these employees. As a result, we are dependent and our hotel managers to make appropriate staffing decisions and to appropriately reduce staffing when market conditions are poor, and have less ability in the COVID-19 environment to reduce staffing at our hotels than we would if we employed such personnel directly. As a result, our hotels may be staffed at a level higher than we would choose if we employed the personnel required to operate the hotels. In addition, we may be less likely to take aggressive actions (such as delaying payments owed to our hotel managers) in order to influence the staffing decisions made by Remington Hotels, which is our affiliate.
We are required to make minimum base management fee payments to our advisor, Ashford Inc., under our advisory agreement, which must be paid even if our total market capitalization and performance decline. Similarly, we are required to make minimum base hotel management fee payments under our hotel management agreements with Remington Hotels, a subsidiary of Ashford Inc., which must be paid even if revenues at our hotels decline significantly.
Pursuant to the advisory agreement between us and our advisor, we must pay our advisor on a monthly basis a base management fee (based on our total market capitalization and performance), subject to a minimum base management fee. The minimum base management fee is equal to the greater of: (i) 90% of the base fee paid for the same month in the prior fiscal year; and (ii) 1/12th of the “G&A Ratio” for the most recently completed fiscal quarter multiplied by our total market capitalization on the last balance sheet date included in the most recent quarterly report on Form 10-Q or annual report on Form 10-K that we file with the SEC. Thus, even if our total market capitalization and performance decline, including as a result of the impact of COVID-19, we will still be required to make monthly payments to our advisor equal to the minimum base management fee (which we expect will equal 90% of the base fee paid for the same month in the prior fiscal year), which could adversely impact our liquidity and financial condition.
Similarly, pursuant to our hotel management agreement with Remington Hotels, a subsidiary of Ashford Inc., we pay Remington Hotels monthly base hotel management fees on a per hotel basis equal to the greater of approximately $14,000 (increased annually based on consumer price index adjustments) or 3% of gross revenues. As a result, even if revenues at our hotels decline significantly, we will still be required to make minimum monthly payments to Remington Hotels equal to approximately $14,000 per hotel (increased annually based on consumer price index adjustments), which could adversely impact our liquidity and financial condition.
We are dependent on the services provided by our advisor, Ashford Inc., and there is a substantial doubt about our advisor’s ability to continue as a going concern.
We have no employees. Our appointed officers are provided by our advisor, and employees of our advisor perform various services pursuant to the advisory agreement that enable us to run our business, including acquisition, asset management, capital markets, accounting, tax, risk management, legal, redevelopment, and other corporate management services and functions. Our advisor has publicly disclosed that it had a negative $29.0 million working capital position as of March 31, 2020 and that, as a result of the effect of the COVID-19 pandemic on our advisor’s business and its financial condition, there is a substantial doubt about our advisor’s ability to continue as a going concern. If as a result of our advisor’s
 
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financial condition the level or quality of the services our advisor provides were materially to decline, it would impair our business and potentially lead to disputes with our advisor. If our advisor were to suffer certain insolvency events (including by declaring bankruptcy), we would be permitted to terminate our advisory agreement without payment of a termination fee to our advisor, but entering into an advisory arrangement with a replacement advisor would be highly disruptive to our operations and would likely have a material adverse effect on our ability to operate our business.
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 have in the past and 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. In such event, we may not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. 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, if neither we nor the partner or co-venturer has 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 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.
Our business strategy depends on our continued growth. We may fail to integrate recent and additional investments into our operations or otherwise manage our future growth, which may adversely affect our operating results.
We cannot assure you that we will be able to adapt our management, administrative, accounting, and operational systems, or our advisor will be able to hire and retain sufficient operational staff to successfully integrate and manage any future acquisitions of additional assets without operating disruptions or unanticipated costs. Acquisitions of any property or additional portfolios of properties could generate additional operating expenses for us. Any future acquisitions may also require us to enter into property improvement plans that will increase our use of cash and could disrupt performance. As we acquire additional assets, we will be subject to the operational risks associated with owning those assets. Our failure to successfully integrate any future acquisitions into our portfolio could have a material adverse effect on our results of operations and financial condition and our ability to pay dividends to our stockholders.
Because our Board of Directors and our advisor have broad discretion to make future investments, we may make investments that result in returns that are substantially below expectations or that result in net operating losses.
Our Board of Directors and our advisor have broad discretion, within the investment criteria established by our Board of Directors, to make additional investments and to determine the timing of such investments. 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, including with respect to our dividend policies on our common and preferred stock. Such discretion could result in investments with returns inconsistent with expectations.
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 standards could result in the loss or cancellation of a franchise license. With respect to operational standards, we rely on our hotel managers to conform to such standards. At times we may not be in compliance with such standards. Franchisors may
 
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also require us to make certain capital improvements to maintain the hotel in accordance with system standards, the cost of which can be substantial. It is possible that a franchisor could condition the continuation of a franchise based on the completion of capital improvements that our advisor or 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, our advisor or 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.
We may be unable to identify additional investments that meet our investment criteria or to acquire the properties we have under contract.
We cannot assure you that we will be able to identify real estate investments that meet our investment criteria, that we will be successful in completing any investment we identify, or that any investment we complete will produce a return on our investment. Moreover, we have broad authority to invest in any real estate investments that we may identify in the future. We cannot assure you that we will acquire properties we currently have under firm purchase contracts, if any, or that the acquisition terms we have negotiated will not change.
Our investments are concentrated in particular segments of a single industry.
Nearly all of our business is hotel related. Our current strategy is predominantly to acquire upper upscale hotels, as well as when conditions are favorable to acquire first mortgages on hotel properties, invest in other mortgage-related instruments such as mezzanine loans to hotel owners and operators, and participate in hotel sale-leaseback transactions. Adverse conditions in the hotel industry, including as a result of COVID-19, will have a material adverse effect on our operating and investment revenues and cash available for distribution to our stockholders.
Our reliance on Remington Hotels, a subsidiary of Ashford Inc., and on third party hotel managers to operate our hotels and for a substantial majority of our cash flow may adversely affect us.
Because U.S. 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 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 have entered into management agreements with Remington Hotels, a subsidiary of Ashford Inc., to manage 79 of our 116 hotel properties and the WorldQuest condominium properties as of March 31, 2020. We have hired unaffiliated third-party hotel managers to manage our remaining properties. We do not supervise any of the hotel managers or their respective personnel on a day-to-day basis, and we cannot assure you that the hotel managers will 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. We also cannot assure you that our hotel managers will not be negligent in their performance, will not engage in criminal or fraudulent activity, or will not otherwise default on their respective management obligations to us. If any of the foregoing occurs, 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
 
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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. We generally will attempt to resolve any such disputes through discussions and negotiations; however, if we are unable to reach satisfactory results 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 adversely affect us.
Our cash flow from the hotels may be adversely affected if our managers fail to provide quality services and amenities or if they or their affiliates fail to maintain a quality brand name. In addition, our managers or their affiliates may manage, and in some cases may own, invest in or provide credit support or operating guarantees, to hotels that compete with hotel properties that we own or acquire, which may result in conflicts of interest and decisions regarding the operation of our hotels that are not in our best interests. Any of these circumstances could adversely affect us.
Our management agreements could adversely affect our sale or financing of hotel properties.
We have entered into management agreements, and acquired properties subject to management agreements, that do not allow us to replace hotel managers on relatively short notice or with limited cost or contain other restrictive covenants, and 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 in our best interest and could incur substantial expense as a result of the agreements.
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 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 cannot assure you that we will be able to obtain additional debt or equity financing or that we will be able to obtain it on favorable terms.
In light of the downturn of our business and Ashford Inc.’s business occasioned by COVID-19, we may not realize the anticipated benefits of the Enhanced Return Funding Program.
On June 26, 2018, we entered into the Enhanced Return Funding Program Agreement and Amendment No. 1 to the Amended and Restated Advisory Agreement (the “ERFP Agreement”) with Ashford Inc. and Ashford LLC, which generally provides that Ashford LLC will provide funding to facilitate the acquisition of properties by us that are recommended by Ashford LLC, in an aggregate amount of up to $50 million (subject to increase to up to $100 million by mutual agreement). In light of the downturn of our business and Ashford Inc.’s business occasioned by COVID-19, we may not realize the anticipated benefits of the ERFP Agreement. Specifically, as of the date of this filing, Ashford LLC has a remaining commitment to provide approximately $9.4 million in ERFP funding to us in respect of its initial $50 million commitment.
Ashford LLC, however, is not required to commit to provide funding under the ERFP Agreement if its unrestricted cash balance, after taking into account the cash amount required for such funding, would be less than $15.0 million. Given the significant negative impact that COVID-19 has had on the business of Ashford Inc. and Ashford LLC, it is uncertain whether Ashford LLC will be able to provide us with this additional funding, either because Ashford LLC’s unrestricted cash balance falls below $15.0 million or Ashford LLC is otherwise financially unable or unwilling to provide such funding. Moreover, we are also entitled to receive an additional $11.4 million in payments from Ashford LLC with respect to our purchase of the Embassy Suites New York Manhattan Times Square in 2019. On March 13, 2020, an extension agreement was entered into whereby the due date for such payment was extended to December 31, 2022. It is uncertain whether Ashford LLC will be able to make this payment and, if such payment is made, the timing
 
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of such payment. Furthermore, if Ashford Inc. and Ashford LLC do not fulfill their contractual obligations pursuant to the ERFP Agreement, we may choose not to enforce, or to enforce less vigorously, our rights because of our desire to maintain our ongoing relationship with Ashford Inc. and Ashford LLC, and legal action against either party could negatively impact that relationship.
Additionally, under the terms of the ERFP Agreement, we are required on a going forward basis to pay an asset management fee to our advisor, Ashford Inc., with respect to any hotel purchased with money funded pursuant to the ERFP Agreement, even after such hotel is disposed of, including as a result of foreclosure. As a result, if any hotel purchased with funds provided pursuant to the ERFP Agreement is foreclosed upon or otherwise disposed of, including the Embassy Suites New York Manhattan Times Square or the Hilton Scotts Valley hotel in Santa Cruz, California (the property level secured debt of each of which is in default and has been accelerated by lenders), we will still be obligated to pay Ashford Inc. an asset management fee as if we continued to own those hotels.
We compete with other hotels for guests and face competition for acquisitions and sales of hotel properties and of desirable debt investments.
The hotel business is competitive. Our hotels compete on the basis of location, room rates, quality, service levels, amenities, loyalty programs, reputation and reservation systems, among many other factors. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in some cases may be lower revenue, which would result in lower cash available to meet debt service obligations, operating expenses and requisite distributions to our stockholders. We compete for hotel acquisitions with entities that have similar investment objectives as we do. 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. In addition, we 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. We may also compete for mortgage asset investments with numerous public and private real estate investment vehicles, such as mortgage banks, pension funds, other REITs, institutional investors, and individuals. Mortgages and other investments are often obtained through a competitive bidding process. In addition, competitors may seek to establish relationships with the financial institutions and other firms from which we intend to purchase such assets. Competition may result in higher prices for mortgage assets, lower yields, and a narrower spread of yields over our borrowing costs. Some of our competitors are larger than us, may have access to greater capital, marketing, and other financial resources, may have personnel with more experience than our officers, may be able to accept higher levels of debt or otherwise may tolerate more risk than us, may have better relations with hotel franchisors, sellers or lenders, and may have other advantages over us in conducting certain business and providing certain services.
We face risks related to changes in the domestic and global political and economic environment, including capital and credit markets.
Our business may be impacted by domestic and global economic conditions. Political crises in the U.S. and other international countries or regions, including sovereign risk related to a deterioration in the credit worthiness or a default by local governments, may negatively affect global economic conditions and our business. If the U.S. or global economy experiences volatility or significant disruptions, such disruptions or volatility could hurt the U.S. economy and our business could be negatively impacted by reduced demand for business and leisure travel related to a slowdown in the general economy, by disruptions resulting from credit markets, higher operating costs and by liquidity issues resulting from an inability to access credit markets to obtain cash to support operations.
We are increasingly dependent on information technology, and potential cyber-attacks, security problems or other disruption and expanding social media vehicles present new risks.
As do most companies, our advisor and our various 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. Our advisor and our hotel managers
 
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purchase some of our information technology from vendors, on whom our systems depend, and our advisor relies on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts.
We often depend upon the secure transmission of this information over public networks. Our advisor’s and our hotel managers’ networks and storage applications may 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 is difficult to anticipate or immediately detect such incidents and the damage caused thereby. Any significant breakdown, invasion, destruction, interruption or leakage of our advisor’s or our hotel managers’ systems could harm us.
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. 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. No assurance can be given that applicable laws or regulations will not be amended or construed differently or that new laws and regulations will not be adopted, either of which could materially adversely affect our business, financial condition or results of operations.
Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting.
The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting could result in misstatements of our results of operations, restatements of our or could otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.
We may experience losses caused by severe weather conditions, natural disasters or the physical effects of climate change.
Our properties are susceptible to revenue loss, cost increase or damage caused by severe weather conditions or natural disasters such as hurricanes, earthquakes, tornadoes and floods, as well as the effects of climate change. To the extent climate change causes changes in weather patterns, we could experience increases in storm intensity and rising sea-levels. Over time, these conditions could result in declining hotel demand, significant damage to our properties or our inability to operate the affected hotels at all.
We believe that our properties are adequately insured, consistent with industry standards, to cover reasonably anticipated losses that may be caused by hurricanes, earthquakes, tornadoes, floods and other severe weather conditions and natural disasters, including the effects of climate change. Nevertheless, we are subject to the risk that such insurance will not fully cover all losses and, depending on the severity of the event and the impact on our properties, such insurance may not cover a significant portion of the losses
 
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including but not limited to the costs associated with evacuation. These losses may lead to an increase in our cost of insurance, a decrease in our anticipated revenues from an affected property or a loss of all or a portion of the capital we have invested in an affected property. In addition, we may not purchase insurance under certain circumstances if the cost of insurance exceeds, in our judgment, the value of the coverage relative to the risk of loss. Also, changes in federal and state legislation and regulation relating to climate change could result in increased capital expenditures to improve the energy efficiency and resiliency of our existing properties and could also necessitate spending more on our new development properties without a corresponding increase in revenue.
We face risks related to an ongoing Securities and Exchange Commission investigation.
In June 2020, each of the Ashford Companies received an administrative subpoena from the SEC requesting the production of documents and other information since January 1, 2018 relating to, among other things, related party transactions, accounting policies, procedures, and internal controls (1) among the Ashford Companies or (2) between any of the Ashford Companies and any officer, director or owner of the Ashford Companies or any entity controlled by any such person.
The Company is responding to the SEC’s request and at this point we are unable to predict what the timing or the outcome of the SEC investigation may be or what, if any, consequences the SEC investigation may have with respect to the Company. However, the SEC investigation could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC were to determine that legal violations occurred, we could be required to pay civil and/or criminal penalties or other amounts, remedies or conditions could be imposed as part of any resolution. We can provide no assurances as to the outcome of the SEC investigation.
Risks Related to Our Debt Financing
We have a significant amount of debt, and our organizational documents have no limitation on the amount of additional indebtedness that we may incur in the future.
As of March 31, 2020, we had approximately $4.1 billion of outstanding indebtedness, including approximately $3.8 billion of variable interest rate debt, and we expect to incur additional indebtedness, including additional variable-rate debt. In the future, we may incur additional indebtedness to finance future hotel acquisitions, capital improvements and development activities and other corporate purposes. A substantial level of indebtedness could have adverse consequences for our business, results of operations and financial position because it could, among other things:

require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general corporate purposes, including to pay dividends on our Common Stock and our preferred stock as currently contemplated or necessary to satisfy the requirements for qualification as a REIT;

increase our vulnerability to general adverse economic and industry conditions and limit our flexibility in planning for, or reacting to, changes in our business and our industry;

limit our ability to borrow additional funds or refinance indebtedness on favorable terms or at all to expand our business or ease liquidity constraints; and

place us at a competitive disadvantage relative to competitors that have less indebtedness.
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. Generally, our mortgage debt carries maturity dates or call dates such that the loans become due prior to their full amortization. It may be difficult to refinance or extend the maturity of such loans on terms acceptable to us, or at all. These conditions could adversely affect our financial position, results of operations, and cash flows or the market price of our stock.
Increases in interest rates could increase our debt payments.
As of March 31, 2020, we had approximately $4.1 billion of outstanding indebtedness, including approximately $3.8 billion of variable interest rate debt, and we expect to incur additional indebtedness,
 
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including additional variable-rate debt. Increases in interest rates increase our interest costs on our variable-rate debt and could increase interest expense on any future fixed rate debt we may incur, 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 above under “We have a significant amount of debt, and our organizational documents have no limitation on the amount of additional indebtedness that we may incur in the future.”
We have defaulted on our property level secured debt and if we are unable to negotiate forbearance agreements, the lenders may foreclose on our hotels.
Nearly all of the Company’s properties are pledged as collateral for a variety of loans. On or about March 17, 2020, we sent notice to all of our lenders notifying such lenders that the spread of COVID-19 was having a significant negative impact on the travel and hospitality industry and that our hotels were experiencing a severe decrease in revenue, resulting in a negative impact on cash flow. While our loan agreements do not contain forbearance rights, we requested a modification to the terms of the loans. Specifically, we requested that for a period of time, shortfalls in debt service payments accrue without penalty and all extension options be deemed granted notwithstanding the existence of any debt service payment accruals. Beginning on April 1, 2020, we did not make principal or interest payments under nearly all of our loans, which constituted an “Event of Default” as such term is defined under the applicable loan documents. Pursuant to the terms of the applicable loan documents, such an Event of Default caused an automatic increase in the interest rate on our outstanding loan balance for the period such Event of Default remains outstanding. Following an Event of Default, our lenders can generally elect to accelerate all principal and accrued interest payments that remain outstanding under the applicable loan agreement and foreclose on the applicable hotel properties that are security for such loans. The lenders who hold the mezzanine loan notes secured by the Embassy Suites New York Manhattan Times Square and the mortgage note secured by the Hilton Scotts Valley hotel in Santa Cruz, California have each sent us an acceleration notice which accelerated all payments due under the applicable loan documents. In addition, the lender for the W Hotel in Minneapolis, Minnesota and the lender for our Rockbridge Portfolio, which is an eight hotel portfolio, have each sent to us a notice of UCC sale, which provides that the respective lender will sell the subsidiaries of the Company that own the respective hotels in a public auction. The Company is in the process of negotiating forbearance agreements with its lenders. At this time, forbearance agreements have been executed on some, but not all of our loans. On July 16, 2020, we reached a forbearance agreement with our lenders in the Highland Pool loan, which is a $907,030,000 loan secured by nineteen of our hotels. The forbearance agreement allows the Company to defer interest payments for six months in exchange for the Company’s agreement to a repayment schedule. In the aggregate, including the Highland Pool loan, we have entered into forbearance agreements and accommodation agreements with varying terms and conditions that conditionally waive or defer payment defaults for loans with a total outstanding principal balance of $1,067,461,000 out of $4,115,717,000 in property level debt outstanding as of March 31, 2020. We cannot predict the likelihood that the remaining forbearance agreement discussions will be successful. If we are unsuccessful in negotiating these forbearance agreements, the lenders could potentially foreclose on our hotels. In addition, the senior lenders and mezzanine lenders who hold notes secured by the Embassy Suites New York Manhattan Times Square are parties to a guaranty with a third party, which guaranty the mezzanine lenders can call upon to make payment of up to $20 million now that the mezzanine loans have been accelerated. As of June 30, 2020, the principal and accrued interest amo unt of the notes currently held by the senior lenders, senior mezzanine lenders and junior mezzanine lenders is approximately $111.7 million, $27.4 million and $10.5 million, respectively. If the lenders call upon the guaranty, and the third party guarantor makes payments under the guaranty, the guarantor has the right to require us to reimburse them for the amount paid under the guaranty. If we do not reimburse the guarantor, the guarantor will have the option to purchase the equity in the entity which owns the Embassy Suites New York Manhattan Times Square hotel for $1. If the guarantor exercises this call option, we will no longer own the Embassy Suites New York Manhattan Times Square. A foreclosure or exercise of the call option may also result in reputational risks with lenders that could make it more difficult, or more costly, to obtain loans in the future.
Any such Event of Default, acceleration of payments, or foreclosure of our assets could have a material adverse effect on our financial condition, results of operations and cash flows and ability to continue to operate or make distributions to our stockholders in the future. In addition, an Event of Default could trigger a termination fee under the advisory agreement with Ashford Inc. An Event of Default could
 
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significantly limit our financing alternatives, which could cause us to curtail our investment activities and/or dispose of assets. It is also possible that we could become involved in litigation related to matters concerning the defaulted loans, and such litigation could result in significant costs to us.
In addition to losing the applicable properties, a foreclosure may result in recognition of taxable income. Under the Code, a foreclosure of property securing non-recourse debt 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 foreclosure even though we did 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.
We may enter into other transactions which could further exacerbate the risks to our financial condition. The use of debt to finance future acquisitions could restrict operations, inhibit our ability to grow our business and revenues, and negatively affect our business and financial results.
We intend to incur additional debt in connection with future hotel acquisitions. We may, in some instances, borrow new funds to acquire hotels. In addition, we may incur mortgage debt by obtaining loans secured by a portfolio of some or all of the hotels that we own or acquire. If necessary or advisable, we also may borrow funds to make distributions to our stockholders to maintain our qualification as a REIT for U.S. federal income tax purposes. To the extent that we incur debt in the future and do not have sufficient funds to repay such debt at maturity, it may be necessary to refinance the debt through debt or equity financings, which may not be available on acceptable terms or at all and which could be dilutive to our stockholders. If we are unable to refinance our debt on acceptable terms or at all, we may be forced to dispose of hotels at inopportune times or on disadvantageous terms, which could result in losses. To the extent we cannot meet our future debt service obligations, we will risk losing to foreclosure some or all of our hotels that may be pledged to secure our obligation.
Covenants, “cash trap” provisions or other terms in our mortgage loans, 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 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.
There is refinancing risk associated with our debt.
We finance our long-term growth and liquidity needs with debt financings having staggered maturities, and use variable-rate debt or a mix of fixed and variable-rate debt as appropriate based on favorable interest rates, principal amortization and other terms. In the event that we do not have sufficient funds to repay the debt at the maturity of these loans, we will need to refinance this debt. If the credit environment is constrained at the time of our debt maturities, we would have a very difficult time refinancing debt. When we refinance our debt, prevailing interest rates and other factors may result in paying a greater amount of debt service, which will adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to choose from a number of unfavorable options. These options include agreeing to otherwise unfavorable financing terms on one or more of our unencumbered assets, selling one or more hotels on disadvantageous terms, including unattractive prices or defaulting on the mortgage and permitting the lender to foreclose. Any one of these
 
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options could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders. If we sell a hotel, the required loan repayment may exceed the sale proceeds.
Our hedging strategies may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on an investment in our company.
We may use various financial instruments, including derivatives, to provide a level of protection against interest rate increases and other risks, but no hedging strategy can protect us completely. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes or other risks 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. We cannot assure you that our hedging strategy and the instruments that we use will adequately offset the risk of interest rate volatility or other risks or that our hedging transactions will not result in losses that may reduce the overall return on your investment.
We may be adversely affected by changes in LIBOR reporting practices, the method in which LIBOR is determined or the use of alternative reference rates.
As of December 31, 2019, we had approximately $3.8 billion of variable interest rate debt as well as interest rate derivatives including caps and floors that are indexed to the London Interbank Offered Rate (“LIBOR”). In July 2017, the United Kingdom regulator that regulates LIBOR announced its intention to phase out LIBOR rates by the end of 2021. The Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, has proposed replacing USD-LIBOR with a new index calculated by short-term repurchase agreements, the Secured Overnight Financing Rate. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Such developments and any other legal or regulatory changes in the method by which LIBOR is determined or the transition from LIBOR to a successor benchmark may result in, among other things, a sudden or prolonged increase or decrease in LIBOR, a delay in the publication of LIBOR, and changes in the rules or methodologies in LIBOR, which may discourage market participants from continuing to administer or to participate in LIBOR’s determination and, in certain situations, could result in LIBOR no longer being determined and published. If a published U.S. dollar LIBOR rate is unavailable after 2021, the interest rates on our debt which is indexed to LIBOR will be determined using various alternative methods, any of which may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on such debt if U.S. dollar LIBOR was available in its current form. Further, the same costs and risks that may lead to the unavailability of U.S. dollar LIBOR may make one or more of the alternative methods impossible or impracticable to determine. Any of these proposals or consequences could have a material adverse effect on our financing costs, and as a result, our financial condition, operating results and cash flows.
Risks Related to Hotel Investments
We are subject to general risks associated with operating hotels.
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:

adverse effects of COVID-19, including a potential general reduction in business and personal travel and potential travel restrictions in regions where our hotels are located;

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;
 
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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 with laws and regulations, fiscal policies and ordinances;

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 flu, SARS, the Zika virus, MERS and other future outbreaks of infectious diseases, imposition of taxes or surcharges by regulatory authorities, travel-related accidents, travel infrastructure interruptions and unusual weather patterns, including natural disasters such as wildfires, 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;

political instability;

travel restrictions (whether government-imposed or voluntary); 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, as well as the hotels underlying our mortgage and mezzanine loans, 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.
The outbreak of COVID-19 has and will continue to significantly reduce our occupancy rates and RevPAR.
Our business has been and will continue to be materially adversely affected by the impact of, and the public concern about, a pandemic disease. In December 2019, COVID-19 was identified in Wuhan, China, which subsequently spread to other regions of the world, and has resulted in increased travel restrictions and extended shutdown of certain businesses, including in every state in the United States. Since late February 2020, we have experienced a significant decline in occupancy and RevPAR and we expect the significant occupancy and RevPAR reduction associated with COVID-19 to continue as we are recording significant reservation cancellations as well as a significant reduction in new reservations relative to prior expectations. The continued outbreak of the virus in the U.S. has and will continue to further reduce travel and demand at our hotels. The prolonged occurrence of the virus has resulted in health or other government authorities imposing widespread restrictions on travel or other market impacts. The hotel industry and our portfolio have and we expect will continue to experience the postponement or cancellation of a significant number of business conferences and similar events. At this time those restrictions are very fluid and evolving. We have been and will continue to be negatively impacted by those restrictions. Given that the type, degree and length of such restrictions are not known at this time, we cannot predict the overall impact of such restrictions on us or the overall economic environment. In addition, even after the restrictions are lifted, the propensity of people to travel and for businesses to hold conferences will likely remain below historical levels for an additional period of time that is difficult to predict. We may also face increased risk of litigation if we have guests or employees who become ill due to COVID-19.
As such, the impact these restrictions may have on our financial position, operating results and liquidity cannot be reasonably estimated at this time, but the impact will likely be material. Additionally, the
 
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public perception of a risk of a pandemic or media coverage of these diseases, or public perception of health risks linked to perceived regional food and beverage safety has materially adversely affected us by reducing demand for our hotels. Currently, no vaccines have been developed, and there can be no assurance that an effective vaccine will be developed soon, or ever. These events have resulted in a sustained, significant drop in demand for our hotels and could have a material adverse effect on us.
Declines in or disruptions to the travel industry could adversely affect our business and financial performance.
Our business and financial performance are affected by the health of the worldwide travel industry. Travel expenditures are sensitive to personal and business-related discretionary spending levels, tending to decline or grow more slowly during economic downturns, as well as to disruptions due to other factors, including those discussed below. Decreased travel expenditures could reduce the demand for our services, thereby causing a reduction in revenue. For example, during regional or global recessions, domestic and global economic conditions can deteriorate rapidly, resulting in increased unemployment and a reduction in expenditures for both business and leisure travelers. A slower spending on the services we provide could have a negative impact on our revenue growth.
Other factors that could negatively affect our business include: terrorist incidents and threats and associated heightened travel security measures; political and regional strife; acts of God such as earthquakes, hurricanes, fires, floods, volcanoes and other natural disasters; war; concerns with or threats of pandemics, contagious diseases or health epidemics, such as COVID-19, Ebola, H1N1 influenza (swine flu), MERS, SARs, avian flu, the Zika virus or similar outbreaks; environmental disasters; lengthy power outages; increased pricing, financial instability and capacity constraints of air carriers; airline job actions and strikes; fluctuations in hotel supply, occupancy and ADR; changes to visa and immigration requirements or border control policies; imposition of taxes or surcharges by regulatory authorities; and increases in gasoline and other fuel prices.
Because these events or concerns, and the full impact of their effects, are largely unpredictable, they can dramatically and suddenly affect travel behavior by consumers and decrease demand. Any decrease in demand, depending on its scope and duration, together with any future issues affecting travel safety, could significantly and adversely affect our business, working capital and financial performance over the short and long-term. In addition, the disruption of the existing travel plans of a significant number of travelers upon the occurrence of certain events, such as severe weather conditions, actual or threatened terrorist activity, war or travel-related health events, could result in significant additional costs and decrease our revenues, in each case, leading to constrained liquidity.
Some 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.
Some of our hotels are on land subject to ground leases, at least two of which cover the entire property. Accordingly, we only own a long-term leasehold rather than a fee simple interest, with respect to all or a portion of the real property at these hotels. We may not continue to make payments due on our ground leases, particularly in light of the downturn in our business occasioned by COVID-19. If we fail to make a payment on a ground lease or are otherwise found to be in breach of a ground lease, we could lose the right to use the hotel or the portion of the hotel property that is subject to the ground lease. In addition, unless we can purchase the fee simple interest in the underlying land and improvements, or extend the terms of these ground leases before their expiration, we will lose our right to operate these properties and our interest in the improvements upon expiration of the ground leases. We may not be able to renew any ground lease upon its expiration, or if renewed, the terms may not be favorable. 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 need 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. Our ability to refinance a hotel property subject to a ground lease may be negatively impacted as the ground lease expiration date approaches.
 
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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 FF&E. Managers or franchisors of our hotels also will require periodic capital improvements pursuant to the management agreements or as a condition of maintaining franchise licenses. Generally, we are responsible for the cost of these capital improvements. We may also develop hotel properties, timeshare units or other alternate uses of portions of our existing properties, including the development of retail, residential, office or apartments, including through joint ventures. Such 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;

governmental restrictions on the nature or size of a project;

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;

acts of God such as earthquakes, hurricanes, floods or fires that could adversely affect a project;

environmental problems; and

disputes with franchisors or hotel 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 obtain additional debt or equity financing to fund future capital improvements, and we may not be able to meet the loan covenants in any financing obtained to fund the new development, creating default risks.
In addition, to the extent that developments are conducted through joint ventures, this creates additional risks, including the possibility that our partners may not meet their financial obligations or could have or develop business interests, policies or objectives that are inconsistent with ours. See “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.”
Any of the above factors could affect adversely our and our partners’ ability to complete the developments on schedule and along the scope that currently is contemplated, or to achieve the intended value of these projects. For these reasons, there can be no assurances as to the value to be realized by the company from these transactions or any future similar transactions.
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 any 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. We can provide no assurances that our cash flows will 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, and we can provide no assurances that such borrowings will be available on favorable terms, if at all.
 
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The cyclical nature of the lodging industry may cause fluctuations in our operating performance, which could have a material adverse effect on us.
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. We can provide no assurances regarding whether, or the extent to which, lodging demand will exceed supply and if so, for what period of time. 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 us.
Many real estate costs are fixed, 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 debt service associated with these new hotels. If we are unable to offset real estate costs with sufficient revenues across our portfolio, we may be adversely affected.
Our operating expenses may increase in the future which could cause us to raise our room rates, which may deplete room occupancy, or cause us to realize lower net operating income as a result of increased expenses that are not offset by increased room rates, in either case decreasing our cash flow and our operating results.
Operating expenses, such as expenses for fuel, utilities, labor and insurance, are not fixed and may increase in the future. To the extent such increases affect our room rates and therefore our room occupancy at our lodging properties, our cash flow and operating results may be negatively 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. 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 at the expense of brand identification. These intermediaries may hope that consumers will eventually develop brand loyalties to their reservations system rather than to the brands under which our properties are franchised. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases significantly, rooms revenue may be lower than expected, and we may be adversely affected.
We 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 we may be adversely affected.
Our hotels may be subject to unknown or contingent liabilities which could cause us to incur substantial costs.
The hotel properties that we own or may acquire are or may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to the sales of the hotel properties may not survive the closing of the transactions. While we will seek to require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification may be
 
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limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may adversely affect our financial condition, results of operations, the market price of our Common Stock and our ability to make distributions to our stockholders.
Future terrorist attacks or changes in terror alert levels could materially and adversely affect us.
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, which could materially adversely affect us.
During 2019, approximately 11% of our total hotel revenue was generated from nine hotels located in the Washington D.C. area, one of several key U.S. markets considered vulnerable to terrorist attack. Our financial and operating performance may be adversely affected by potential terrorist attacks. Terrorist attacks in the future may cause our results to differ materially from anticipated results. Hotels we own in other market locations may be subject to this risk as well.
We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor.
Our managers, including Remington Hotels, a subsidiary of Ashford Inc., and unaffiliated 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 at those 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 involving our managers and their labor force or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to increased labor costs, a significant component of our hotel operating 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 negotiations. Our third party managers may also be unable to hire quality personnel to adequately staff hotel departments, which could result in a sub-standard level of service to hotel guests and hotel operations.
Hotels where our managers have collective bargaining agreements with their employees are more highly affected by labor force activities than others. 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. Furthermore, labor agreements may limit the ability of our hotel managers to reduce the size of hotel workforces during an economic downturn because collective bargaining agreements are negotiated between the hotel managers and labor unions. Our ability, if any, to have any material impact on the outcome of these negotiations is restricted by and dependent on the individual management agreement covering a specific property, and we may have little ability to control the outcome of these negotiations.
In addition, changes in labor laws may negatively impact us. For example, the implementation of new occupational health and safety regulations, minimum wage laws, and overtime, working conditions status and citizenship requirements and the Department of Labor’s proposed regulations expanding the scope of non-exempt employees under the Fair Labor Standards Act to increase the entitlement to overtime pay could significantly increase the cost of labor in the workforce, which would increase the operating costs of our hotel properties and may have a material adverse effect on us.
Risks Related to Conflicts of Interest
Our agreements with our external advisor, as well as our mutual exclusivity agreement and management agreements with Remington Hotels and Premier, subsidiaries of Ashford Inc., were not negotiated on an
 
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arm’s-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 our advisor.
Because each of our executive officers are also key employees of our advisor, Ashford LLC, a subsidiary of Ashford Inc. and have ownership interests in Ashford Inc. and because the chairman of our Board of Directors has an ownership interest in Ashford Inc., our advisory agreement, our master hotel management agreement and hotel management mutual exclusivity agreement with Remington Hotels, a subsidiary of Ashford Inc., and our master project management agreement and project management mutual exclusivity agreement with Premier, a subsidiary of Ashford Inc., were not negotiated on an arm’s-length basis, and we did not have the benefit of arm’s-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 an arm’s-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 our advisor and its subsidiaries (including Ashford LLC, Remington Hotels and Premier).
The termination fee payable to our advisor significantly increases the cost to us of terminating our advisory agreement, thereby effectively limiting our ability to terminate our advisor without cause and could make a change of control transaction less likely or the terms thereof less attractive to us and to our stockholders.
The initial term of our advisory agreement with our advisor is 10 years from the effective date of the advisory agreement, with automatic five-year renewal terms thereafter unless previously terminated. Our Board of Directors will review our advisor’s performance and fees annually and, following the 10-year initial term the advisory agreement may be terminated by us with the payment of the termination fee described below and 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 our 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 our advisor does not offer to negotiate a lower fee that a majority of our independent directors determines is fair). Additionally, if there is a change of control transaction, we will have the right to terminate the advisory agreement with the payment of the termination fee described below. If we terminate or do not renew the advisory agreement without cause, including pursuant to clauses (1) or (2) above (following a contractual renegotiation process in the case of clause (2) above) or upon a change of control, we will be required to pay our advisor a termination fee equal to:

(A) 1.1 multiplied by the greater of (i) 12 times the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; (ii) the earnings multiple (calculated as our advisor’s total enterprise value on the trading day immediately preceding the day the termination notice is given to our advisor divided by our advisor’s most recently reported adjusted earnings before interest, tax, depreciation and amortization (“Adjusted EBITDA”) for our advisor’s common stock for the 12 month period preceding the termination date of the advisory agreement) multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; or (iii) the simple average of the earnings multiples for each of the three fiscal years preceding the termination of the advisory agreement (calculated as our advisor’s total enterprise value on the last trading day of each of the three preceding fiscal years divided by, in each case, our advisor’s Adjusted EBITDA for the same periods), multiplied by the net earnings of our advisor for the 12 month period preceding the termination date of the advisory agreement; plus

(B) an additional amount such that the total net amount received by our advisor after the reduction by state and U.S. federal income taxes at an assumed combined rate of 40% on the sum of the amounts described in (A) and (B) shall equal the amount described in (A).
Any such termination fee will be payable on or before the termination date. Moreover, our advisor is entitled to set off, take and apply any of our money on deposit in any of our bank, brokerage or similar accounts (all of which are controlled by, and in the name of, our advisor) to amounts we owe to our advisor—including amounts we would owe to our advisor in respect of the termination fee, and in certain circumstances permits our advisor to escrow any money in such accounts into a termination fee escrow account (to which we would not have access) even prior to the time that the termination fee is payable. The termination fee makes it more difficult for us to terminate our advisory agreement even if our Board of Directors determines that there has been unsatisfactory performance or unfair fees. These provisions
 
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significantly increase the cost to us of terminating our advisory agreement, thereby limiting our ability to terminate our advisor without cause.
Our advisor manages other entities and may direct attractive investment opportunities away from us. If we change our investment guidelines, our advisor is not restricted from advising clients with similar investment guidelines.
Our executive officers also serve as key employees and as officers of our advisor and Braemar, and will continue to do so. Furthermore, Mr. Monty J. Bennett, our chairman, is also the chief executive officer, chairman and a significant stockholder of our advisor and the chairman of Braemar. Our advisory agreement requires our advisor to present investments that satisfy our investment guidelines to us before presenting them to Braemar or any future client of our advisor. Additionally, in the future our advisor may advise other clients, some of which may have investment guidelines substantially similar to ours.
Some portfolio investment opportunities may include hotels that satisfy our investment objectives as well as hotels that satisfy the investment objectives of Braemar or other entities advised by our advisor. If the portfolio cannot be equitably divided, our 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 our advisor to allocate portfolio investment opportunities between us, Braemar or other entities advised by our advisor in a fair and equitable manner, consistent with our, Braemar’s and such other entities’ investment objectives. In making this determination, our 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 and other factors deemed appropriate. In making the allocation determination, our advisor has no obligation to make any such investment opportunity available to us. Further, our advisor and Braemar have agreed that any new investment opportunities that satisfy our investment guidelines will be presented to our Board of Directors; however, our Board of Directors will have only ten business days to make a determination with respect to such opportunity prior to it being available to Braemar. The above mentioned dual responsibilities may create conflicts of interest for our officers which could result in decisions or allocations of investments that may benefit one entity more than the other.
Our advisor and its key employees, who are Braemar’s, Ashford Inc.’s and our executive officers, face competing demands relating to their time and this may adversely affect our operations.
We rely on our advisor and its employees for the day-to-day operation of our business. Certain key employees of our advisor are executive officers of Braemar and Ashford Inc. Because our advisor’s key employees have duties to Braemar and Ashford Inc., 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, Braemar and Ashford Inc. Our advisor may also manage other entities in the future. During turbulent market conditions or other times when we need focused support and assistance from our advisor, other entities for which our advisor also acts as an external advisor will likewise require greater focus and attention as well, placing competing high levels of demand on the limited time and resources of our advisor’s key employees. Additionally, activist investors have, and in the future, may commence campaigns seeking to influence other entities advised by our advisor to take particular actions favored by the activist or gain representation on the Board of Directors of such entities, which could result in additional disruption and diversion of management’s attention. 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.
Our business could be negatively affected as a result of actions by activist stockholders.
Campaigns by stockholders to effect changes in publicly traded companies are sometimes led by activist investors through various corporate actions, including proxy contests. Responding to actions by activist investors can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Stockholder activism could create perceived uncertainties as to our future direction, which could result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners. Furthermore, the election of individuals to our Board of Directors with a specific agenda could adversely affect our ability to effectively and timely implement our strategic plans.
 
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Conflicts of interest could result in our management acting other than in our stockholders’ best interest.
Conflicts of interest in general and specifically relating to Ashford Inc. and its subsidiaries (including Ashford LLC, Remington Hotels and Premier) may lead to management decisions that are not in the stockholders’ best interest. The chairman of our Board of Directors, Mr. Monty J. Bennett, is the chairman, chief executive officer and a significant stockholder of Ashford Inc. and Mr. Archie Bennett, Jr., who is our chairman emeritus, is a significant stockholder of Ashford Inc. Prior to its acquisition by Ashford Inc. on November 6, 2019, Messrs. Archie Bennett, Jr. and Monty J. Bennett beneficially owned 100% of Remington Lodging. As of March 31, 2020, Remington Hotels managed 79 of our 116 hotel properties and the WorldQuest condominium properties and provides other services.
As of July 17, 2020, Mr. Monty J. Bennett and Mr. Archie Bennett, Jr. together owned approximately 433,589 shares of Ashford Inc. common stock, which represented an approximate 17.3% ownership interest in Ashford Inc., and owned 18,758,600 shares of Ashford Inc. Series D Convertible Preferred Stock, which was exercisable (at an exercise price of $117.50 per share) into an additional approximate 3,991,191 shares of Ashford Inc. common stock, which if exercised would have increased the Bennetts’ ownership interest in Ashford Inc. to 68.1%. The 18,758,600 Series D Convertible Preferred Stock owned by Mr. Monty J. Bennett and Mr. Archie Bennett, Jr. include 360,000 shares owned by trusts.
Messrs. Archie Bennett, Jr. and Monty J. Bennett’s ownership interests in, and Mr. Monty J. Bennett’s management obligations to, Ashford Inc. present them with conflicts of interest in making management decisions related to the commercial arrangements between us and Ashford Inc. Mr. Monty J. Bennett’s management obligations to Ashford Inc. (and his obligations to Braemar, where he also serves as chairman of the Board of Directors) reduce the time and effort he spends on us. Our Board of Directors has adopted a policy that requires all material approvals, actions or decisions to which we have the right to make under the master hotel management agreement with Remington Hotels and the master project management agreement with Premier 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 Hotels under the master hotel management agreement and to Premier under the master project management agreement, and Mr. Monty J. Bennett as the chairman and chief executive officer of Ashford Inc., could take actions or make decisions that are not in our stockholders’ best interest or that are otherwise inconsistent with the obligations to us under the master hotel management agreement or master project management agreement.
Holders of units in our operating partnership, including members of our management team, may suffer adverse tax consequences upon our sale of certain properties. Therefore, holders of units, either directly or indirectly, including Messrs. Archie Bennett, Jr. and Monty J. Bennett, or Mr. Mark Nunneley, our Chief Accounting Officer, may have different objectives regarding the appropriate pricing and timing of a particular property’s sale. These officers and directors of ours may influence 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.
We are a party to a master hotel management agreement and a hotel management exclusivity agreement with Remington Hotels and a master project management agreement and a project management exclusivity agreement with Premier, which describes the terms of Remington Hotels’ and Premier’s, respectively, services to our hotels, as well as any future hotels we may acquire that may or may not be property managed by Remington Hotels or project managed by Premier. The exclusivity agreements requires us to engage Remington Hotels for hotel management and Premier for project management, respectively, unless, in each case, our independent directors either: (i) unanimously vote to hire a different manager or developer; or (ii) by a majority vote, elect not to engage Remington Hotels or Premier, as the case may be, because they have determined that special circumstances exist or that, based on Remington Hotels’ or Premier’s prior performance, another manager or developer could perform the duties materially better. As significant owners of Ashford Inc., which would receive any development, management, and management termination fees payable by us under the management agreements, Mr. Monty J. Bennett, and to a lesser extent, Mr. Archie Bennett, Jr., in his role as chairman emeritus, may influence our decisions to sell, acquire, or develop hotels when it is not in the best interests of our stockholders to do so.
 
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Ashford Inc.’s ability to exercise significant influence over the determination of the competitive set for any hotels managed by Remington Hotels could artificially enhance the perception of the performance of a hotel, making it more difficult to use managers other than Remington Hotels for future properties.
Our hotel management mutual exclusivity agreement with Remington requires us to engage Remington Hotels to manage all future properties that we acquire, 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 Hotels or (ii) based on special circumstances or past performance, by a majority vote, elect not to engage Remington Hotels because they have determined, in their reasonable business judgment, that it would be in our best interest not to engage Remington Hotels or that another manager or developer could perform the duties materially better. Under our master hotel management agreement with Remington Hotels, we have the right to terminate Remington Hotels 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 Hotels, its competitive set will consist of a small group of hotels in the relevant market that we and Remington Hotels believe are comparable for purposes of benchmarking the performance of such hotel. Remington Hotels will have significant influence over the determination of the competitive set for any of our hotels managed by Remington Hotels, and as such 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 Hotels-managed hotel, thereby making it more difficult for us to elect not to use Remington Hotels for future hotel management.
Under the terms of our hotel management mutual exclusivity agreement with Remington Hotels, Remington Hotels may be able to pursue lodging investment opportunities that compete with us.
Pursuant to the terms of our hotel management mutual exclusivity agreement with Remington Hotels, if investment opportunities that satisfy our investment criteria are identified by Remington Hotels or its affiliates, Remington Hotels 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 Hotels may then pursue such investment opportunity, subject to a right of first refusal in favor of Braemar, pursuant to an existing agreement between Braemar and Remington Hotels, on materially the same terms and conditions as offered to us. If we were to reject such an investment opportunity, either Braemar or Remington Hotels could pursue the opportunity and compete with us. In such a case, Mr. Monty J. Bennett, our chairman, in his capacity as chairman of Braemar or chief executive officer of Ashford Inc. could be in a position of directly competing with us.
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.
We, as the general partner of our operating partnership, 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, those persons holding common units will 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 are unable to 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 the key employees of our advisor (who are also our executive officers and have ownership interests in our operating partnership) to differ from our stockholders.
 
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Our conflicts of interest policy may not adequately address all of the conflicts of interest that may arise with respect to our activities.
In order to avoid any actual or perceived conflicts of interest with our directors or officers or our advisor’s employees, we adopted a conflicts of interest policy to address specifically some of the conflicts relating to our activities. Although under this policy the approval of a majority of our disinterested directors is required to approve any transaction, agreement or relationship in which any of our directors or officers or our advisor or it has an interest, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will resolve such conflicts in a manner that is favorable to us.
Risks Related to Derivative Transactions
We have engaged in and may continue to engage in derivative transactions, which can limit our gains and expose us to losses.
We have entered into and may continue to enter into hedging transactions to: (i) attempt to take advantage of changes in prevailing interest rates; (ii) protect our portfolio of mortgage assets from interest rate fluctuations; (iii) protect us from the effects of interest rate fluctuations on floating-rate debt; (iv) protect us from the risk of fluctuations in the financial and capital markets; or (v) preserve net cash in the event of a major downturn in the economy. Our hedging transactions may include entering into interest rate swap agreements, interest rate cap or floor agreements or flooridor and corridor agreements, credit default swaps and purchasing or selling futures contracts, purchasing or selling put and call options on securities or securities underlying futures contracts, or entering into forward rate agreements. Hedging activities may not have the desired beneficial impact on our results of operations or financial condition. Volatile fluctuations in market conditions could cause these instruments to become ineffective. Any gains or losses associated with these instruments are reported in our earnings each period. No hedging activity can completely insulate us from the risks inherent in our business.
Credit default hedging could fail to protect us or adversely affect us because if a swap counterparty cannot perform under the terms of our credit default swap, we may not receive payments due under such agreement and, thus, we may lose any potential benefit associated with such credit default swap. Additionally, we may also risk the loss of any cash collateral we have pledged to secure our obligations under such credit default swaps if the counterparty becomes insolvent or files for bankruptcy.
Moreover, interest rate hedging could fail to protect us or adversely affect us because, among other things:

available interest rate hedging may not correspond directly with the interest rate risk for which protections is sought;

the duration of the hedge may not match the duration of the related liability;

the party owing money in the hedging transaction may default on its obligation to pay;

the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

the value of derivatives used for hedging may be adjusted from time to time in accordance with generally accepted accounting principles (“GAAP”) to reflect changes in fair value and such downward adjustments, or “mark-to-market loss,” would reduce our stockholders’ equity.
Hedging involves both risks and costs, including transaction costs, which may reduce our overall returns on our investments. These costs increase as the period covered by the hedging relationship increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distributions to stockholders. We generally intend to hedge to the extent management determines it is in our best interest given the cost of such hedging transactions as compared to the potential economic returns or protections offered. The REIT qualification rules may limit our ability to enter into hedging transactions by requiring us to limit our income and assets from hedges. If we are unable to hedge effectively because of the REIT rules, we will face greater interest rate exposure than may be commercially prudent.
We are subject to the risk of default or insolvency by the hospitality entities underlying our investments.
 
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The leveraged capital structure of the hospitality entities underlying our investments will increase their exposure to adverse economic factors (such as rising interest rates, competitive pressures, downturns in the economy or deterioration in the condition of the real estate industry) and to the risk of unforeseen events. If an underlying entity cannot generate adequate cash flow to meet such entity’s debt obligations (which may include leveraged obligations in excess of its aggregate assets), it may default on its loan agreements or be forced into bankruptcy. As a result, we may suffer a partial or total loss of the capital we have invested in the securities and other investments of such entity.
The derivatives provisions of the Dodd-Frank Act and related rules could have an adverse effect on our ability to use derivative instruments to reduce the negative effect of interest rate fluctuations on our results of operations and liquidity, credit default risks and other risks associated with our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) establishes federal oversight and regulation of the over-the-counter derivatives market and entities, including us, that participate in that market. As required by the Dodd-Frank Act, the Commodities Futures Trading Commission (the “CFTC”), the SEC and other regulators have adopted certain rules implementing the swaps regulatory provisions of the Dodd-Frank Act and are in the process of adopting other rules to implement those provisions. Numerous provisions of the Dodd-Frank Act and the CFTC’s rules relating to derivatives that qualify as “swaps” thereunder apply or may apply to the derivatives to which we are or may become a counterparty. Under such statutory provisions and the CFTC’s rules, we must clear on a derivatives clearing organization any over-the- counter swap we enter into that is within a class of swaps designated for clearing by CFTC rule and execute trades in such cleared swap on an exchange if the swap is accepted for trading on the exchange unless such swap is exempt from such mandatory clearing and trade execution requirements. We may qualify for and intend to elect the end-user exception from those requirements for swaps we enter to hedge our commercial risks and that are subject to the mandatory clearing and trade execution requirements. If we are required to clear or voluntarily elect to clear any swaps we enter into, those swaps will be governed by standardized agreements and we will have to post margin with respect to such swaps. To date, the CFTC has designated only certain types of interest rate swaps and credit default swaps for clearing and trade execution. Although we believe that none of the interest rate swaps and credit default swaps to which we are currently party fall within those designated types of swaps, we may enter into swaps in the future that will be subject to the mandatory clearing and trade execution requirements and subject to the risks described.
Rules recently adopted by banking regulators and the CFTC in accordance with a requirement of the Dodd-Frank Act require regulated financial institutions and swap dealers and major swap participants that are not regulated financial institutions to collect margin with respect to uncleared swaps to which they are parties and to which financial end users, among others, are their counterparties. We will qualify as a financial end user for purposes of such margin rules. We will not have to post initial margin with respect to our uncleared swaps under the new rules because we do not have material swaps exposure as defined in the new rules. However, we will be required to post variation margin (most likely in the form of cash collateral) with respect to each of our uncleared swaps subject to the new margin rules in an amount equal to the cumulative decrease in the market-to-market value of such swap to our counterparty as of any date of determination from the value of such swap as of the date of the swap’s execution. The SEC has proposed margin rules for security-based swaps to which regulated financial institutions are not counterparties. Those proposed rules differ from the CFTC’s margin rules, but the final form that those rules will take and their effect is uncertain at this time.
The Dodd-Frank Act has caused certain market participants, and may cause other market participants, including the counterparties to our derivative instruments, to spin off some of their derivatives activities to separate entities. Those entities may not be as creditworthy as the historical counterparties to our derivatives.
Some of the rules required to implement the swaps-related provisions of the Dodd-Frank Act remain to be adopted, and the CFTC has, from time to time, issued and may in the future issue interpretations and no-action letters interpreting, and clarifying the application of, those provisions and the related rules or delaying compliance with those provisions and rules. As a result, it is not possible at this time to predict with certainty the full effects of the Dodd-Frank Act, the CFTC’s rules and the SEC’s rules on us and the timing of such effects.
 
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The Dodd-Frank Act and the rules adopted thereunder could significantly increase the cost of derivative contracts (including from swap recordkeeping and reporting requirements and through requirements to post margin with respect to our swaps, which could adversely affect our available liquidity), materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the Dodd-Frank Act and the related rules, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures and to pay dividends to our stockholders. Any of these consequences could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Risks Related to Investments in Securities, Mortgages and Mezzanine Loans
Our earnings are dependent, in part, upon the performance of our investment portfolio.
To the extent permitted by the Code, we may invest in and own securities of other public companies and REITs (including Braemar). To the extent that the value of those investments declines or those investments do not provide an attractive return, our earnings and cash flow could be adversely affected.
Debt investments that are not United States government insured involve risk of loss.
As part of our business strategy, we may originate or acquire lodging-related uninsured and mortgage assets, including mezzanine loans. While holding these interests, we are subject to risks of borrower defaults, bankruptcies, fraud and related losses, and special hazard losses that are not covered by standard hazard insurance. Also, costs of financing the mortgage loans could exceed returns on the mortgage loans. In the event of any default under mortgage loans held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan. We suffered significant impairment charges with respect to our investments in mortgage loans in 2009 and 2010. The value and the price of our securities may be adversely affected.
We may invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.
Our mortgage and mezzanine loan assets have typically been non-recourse. With respect to non-recourse mortgage loan assets, in the event of a borrower default, the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan, may be less than the amount owed under the mortgage loan. As to those mortgage loan assets that provide for recourse against the borrower and its assets generally, we cannot assure you that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.
Investment yields affect our decision whether to originate or purchase investments and the price offered for such investments.
In making any investment, we consider the expected yield of the investment and the factors that may influence the yield actually obtained on such investment. These considerations affect our decision whether to originate or purchase an investment and the price offered for that investment. No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions, and the quality of management of the underlying property. Our inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may adversely affect the price of our securities.
Volatility of values of mortgaged properties may adversely affect our mortgage loans.
Lodging property values and net operating income derived from lodging properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described herein relating to general economic conditions, operating lodging properties, and owning real estate investments. In the event its net operating income decreases, one of our borrowers may have difficulty paying our mortgage
 
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loan, which could result in losses to us. In addition, decreases in property values will reduce the value of the collateral and the potential proceeds available to our borrowers to repay our mortgage loans, which could also cause us to suffer losses.
We may not be able to raise capital through financing activities and may have difficulties negotiating with lenders in times of distress due to our complex structure and property-level indebtedness.
Substantially all of our assets are encumbered by property-level indebtedness; therefore, we may be limited in our ability to raise additional capital through property level or other financings. In addition, our ability to raise additional capital could be limited to refinancing existing secured mortgages before their maturity date which may result in yield maintenance or other prepayment penalties to the extent that the mortgage is not open for prepayment at par. Due to these limitations on our ability to raise additional capital, we may face difficulties obtaining liquidity and negotiating with lenders in times of distress.
Mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties.
We may make and acquire mezzanine loans. These types of loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.
The assets associated with certain of our derivative transactions do not constitute qualified REIT assets and the related income will not constitute qualified REIT income. Significant fluctuations in the value of such assets or the related income could jeopardize our REIT status or result in additional tax liabilities.
We have entered into certain derivative transactions to protect against interest rate risks and credit default risks not specifically associated with debt incurred to acquire qualified REIT assets. The REIT provisions of the Code limit our income and assets in each year from such derivative transactions. Failure to comply with the asset or income limitation within the REIT provisions of the Code could result in penalty taxes or loss of our REIT status. If we elect to contribute the non-qualifying derivatives into a TRS to preserve our REIT status, such an action would result in any income from such transactions being subject to U.S. federal income taxation.
Our prior investment performance is not indicative of future results.
The performance of our prior investments is not necessarily indicative of the results that can be expected for the investments to be made by our subsidiaries. On any given investment, total loss of the investment is possible. Although our management team has experience and has had success in making investments in real estate-related lodging debt and hotel assets, the past performance of these investments is not necessarily indicative of the results of our future investments.
Our investment portfolio will contain investments concentrated in a single industry and will not be fully diversified.
We have formed subsidiaries for the primary purpose of acquiring securities and other investments of lodging-related entities. As such, our investment portfolio will contain investments concentrated in a single industry and may not be fully diversified by asset class, geographic region or other criteria, which will expose us to significant loss due to concentration risk. Investors have no assurance that the degree of diversification in our investment portfolio will increase at any time in the future.
The values of our investments are affected by the U.S. credit and financial markets and, as such, may fluctuate.
The U.S. credit and financial markets may experience severe dislocations and liquidity disruptions. The values of our investments are likely to be sensitive to the volatility of the U.S. credit and financial markets, and, to the extent that turmoil in the U.S. credit and financial markets occurs, such volatility has the potential to materially affect the value of our investment portfolio.
 
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We may invest in securities for which there is no liquid market, and we may be unable to dispose of such securities at the time or in the manner that may be most favorable to us, which may adversely affect our business.
We may invest in securities for which there is no liquid market or which may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities generally. The relative illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. Our investments may occasionally be subject to contractual or legal restrictions on resale or will be otherwise illiquid due to the fact that there is no established trading market for such securities, or such trading market is thinly traded. The relative illiquidity of such investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
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 or mortgage loans in our portfolio 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;

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

changes in operating expenses; and

civil unrest, acts of war or terrorism, epidemics, 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 or loans in the future. We cannot predict whether we will be able to sell any hotel property or loan 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 may sell a property at a loss as compared to carrying value. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a hotel property or loan. We may offer more flexible terms on our mortgage loans than some providers of commercial mortgage loans, and as a result, we may have more difficulty selling or participating our loans to secondary purchasers than would these more traditional lenders.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring 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 will be 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 and/or preferred stock could decline.
The costs of compliance with or liabilities under environmental laws may harm our operating results.
 
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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 and properties underlying our loan assets may be subject to environmental liabilities. An owner of real property, or a lender with respect to a party that exercises control over the 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.
There may be environmental problems associated with our hotel properties or properties underlying our loan assets of which we are unaware. Some of our hotel properties or the properties underlying our loan assets 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 or if we foreclose on the property or otherwise have control over the property.
The presence of hazardous substances on a property we own or have made a loan with respect to may adversely affect our ability to sell, on favorable terms or at all, or foreclose on the property, and we may incur substantial remediation costs. The discovery of material environmental liabilities at our properties or properties underlying our loan assets could subject us to unanticipated significant costs.
We generally have environmental insurance policies on each of our owned properties, and we intend to obtain environmental insurance for any other properties that we may acquire. However, if environmental liabilities are discovered during the underwriting of the insurance policies for any property that we may acquire in the future, we may be unable to obtain insurance coverage for the liabilities at commercially reasonable rates or at all, and we may experience losses. In addition, we generally do not require our borrowers to obtain environmental insurance on the properties they own that secure their loans from us.
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 and the properties underlying our mortgage loans 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 or the properties underlying our loan assets could require us or our borrowers 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 or our borrowers 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 or our borrowers to incur substantial costs.
All of our properties and properties underlying our mortgage loans 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 and our
 
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borrowers 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 obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property, which could adversely affect our financial condition and ability to make distributions to our stockholders.
We may acquire a hotel property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing, or provide a cap on the amount of damages we can recover. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of income from that property.
We may experience uninsured or underinsured losses.
We have 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 with the intent to satisfy the requirements of lenders and franchisors). In doing so, we have made decisions with respect to what deductibles, policy limits, and terms are reasonable based on management’s experience, our risk profile, the loss history of our hotel managers and our properties, the nature of our properties and our businesses, our loss prevention efforts, the cost of insurance and other factors.
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, including losses incurred in relation to the COVID-19 pandemic. 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, there can be no assurance that:

the insurance coverage thresholds that we have obtained will fully protect us against insurable losses (i.e., losses may exceed coverage limits);

we will not incur large deductibles that will adversely affect our earnings;

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

current coverage thresholds will continue to be available at reasonable rates.
In the future, we may choose not to maintain terrorism or other insurance policies on any of our properties. As a result, one or more large uninsured or underinsured losses could have a material adverse effect on us.
Each of our current lenders requires us to maintain certain insurance coverage thresholds, and we anticipate that future lenders will have similar requirements. We believe that we have complied with the insurance maintenance requirements under the current governing loan documents and we intend to comply with any such requirements in any future loan documents. However, a lender may disagree, in which case 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, subject us to a foreclosure on hotels securing one or more loans. In addition, a material casualty to one or more hotels securing 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, or the lender foreclosing on the hotels if there is a material loss that is not insured.
Risks Related to Our Status as a REIT
If we do not qualify as a REIT, we will be subject to tax as a regular corporation and could face substantial tax liability.
 
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We conduct operations so as to qualify as a REIT under the Code. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status or we may be required to rely on a REIT “savings clause.” If we were to rely on a REIT “savings clause,” we would have to pay a penalty tax, which could be material. Due to the gain we recognized as a result of the spin-off of Braemar, if Braemar were to fail to qualify as a REIT for 2013, we may have failed to qualify as a REIT for 2013 and subsequent taxable years. Furthermore, new tax legislation, administrative guidance, or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT.
If we fail to qualify as a REIT in any tax year, then:

we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to our stockholders in computing taxable income and being subject to U.S. federal income tax on our taxable income at regular corporate rates;

we would also be subject to federal alternative minimum tax for taxable years beginning before January 1, 2018, and, possibly, increased state and local income taxes;

any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and

unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year that we lost our qualification, and, thus, our cash available for distribution to stockholders could be reduced for each of the years during which we did not qualify as a REIT.
If, as a result of covenants applicable to our future debt, we are restricted from making distributions to our stockholders, we may be unable to make distributions necessary for us to avoid U.S. federal corporate income and excise taxes and to qualify and maintain our qualification as a REIT, which could materially and adversely affect us. In addition, if we fail to qualify as a REIT, we will not be required to make distributions to stockholders to maintain our tax status. As a result of all of these factors, our failure to qualify as a REIT could impair our ability to raise capital, expand our business, and make distributions to our stockholders and could adversely affect the value of our securities.
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. For example:

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

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 TRSs is a fully taxable corporation and will be subject to federal and state taxes on its income.

We may continue to experience increases in our state and local income tax burden. Over the past several years, certain state and local taxing authorities have significantly changed their income tax regimes in order to raise revenues. The changes enacted that have increased our state and local income tax burden 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.
 
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Failure to make required distributions would subject us to U.S. federal corporate income tax.
We intend to operate in a manner that allows us to continue to qualify as a REIT for U.S. federal income tax purposes. In order to continue 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 deduction 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 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 fixed rent, the net 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 U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we are 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 U.S. 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 U.S. federal income tax purposes, but the IRS may not agree with this characterization. If the leases were not respected as true leases for U.S. 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 20% 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. Finally, the 100% excise tax also applies to the underpricing of services by a TRS to its parent REIT in contexts where the services are unrelated to services for REIT tenants.
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 20% 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
 
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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 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, there can be no assurance that we will be able to avoid application of the 100% excise tax discussed above.
If our hotel managers, including Ashford Hospitality Services, LLC and its subsidiaries (including Remington Hotels) 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 is not 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 lessees is qualifying income for purposes of the REIT gross income tests and that our TRSs qualify to be treated as TRSs for U.S. federal income tax purposes, but there can be no assurance that the IRS will not challenge this treatment or that a court would not sustain such a challenge. If we failed to meet either the asset or gross income tests, we would likely lose our REIT qualification for U.S. federal income tax purposes, unless certain of the REIT “savings clauses” applied.
If our hotel managers, including Ashford Hospitality Services, LLC (“AHS”) and its subsidiaries (including Remington Hotels), do not qualify as “eligible independent contractors,” we 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 hotel managers and their owners, there can be no assurance that these ownership levels will not be exceeded. Additionally, we and AHS and its subsidiaries, including Remington Hotels, must comply with the provisions of the private letter ruling we obtained from the IRS in connection with Ashford Inc.’s acquisition of Remington Hotels to ensure that AHS and its subsidiaries, including Remington Hotels, continue to qualify as “eligible independent contractors.”
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. 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 this reduced maximum rate on qualified dividend income. However, under the Tax Cuts and Jobs Act a non-corporate taxpayer may deduct 20% of ordinary REIT dividends that are not “capital gain dividends” or “qualified dividend income” resulting in an effective maximum U.S. federal income tax rate of 29.6%. 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 corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.
If our operating partnership failed to qualify as a partnership for U.S. federal income tax purposes, we would cease to qualify as a REIT and would be subject to higher taxes and have less cash available for distribution to our stockholders and suffer other adverse consequences.
We believe that our operating partnership qualifies to be treated as a partnership for U.S. federal income tax purposes. As a partnership, our operating partnership is not subject to U.S. federal income tax on its income. Instead, each of its partners, including us, is required to include in income its allocable share of the operating partnership’s income. No assurance can be provided, however, that the IRS will not challenge
 
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its status as a partnership for U.S. federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were successful in treating our operating partnership as a corporation for tax purposes, we would fail to meet the gross income tests and certain of the asset tests applicable to REITs and, accordingly, cease to qualify as a REIT. Also, the failure of our operating partnership to qualify as a partnership would 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.
Note that although partnerships have traditionally not been subject to U.S. federal income tax at the entity level as described above, new audit rules, will generally apply to the partnership. Under the new rules, unless an entity elects otherwise, taxes arising from audit adjustments are required to be paid by the entity rather than by its partners or members. We may utilize exceptions available under the new provisions (including any changes) and Treasury Regulations so that the partners, to the fullest extent possible, rather than the partnership itself, will be liable for any taxes arising from audit adjustments to the issuing entity’s taxable income. One such exception is to apply an elective alternative method under which the additional taxes resulting from the adjustment are assessed from the affected partners (often referred to as a “push-out election”), subject to a higher rate of interest than otherwise would apply. When a push-out election causes a partner that is itself a partnership to be assessed with its share of such additional taxes from the adjustment, such partnership may cause such additional taxes to be pushed out to its own partners. In addition, Treasury Regulations provide that a partner that is a REIT may be able to use deficiency dividend procedures with respect to such adjustments. Many questions remain as to how the partnership audit rules will apply, and it is not clear at this time what effect these rules will have on us. However, it is possible that these changes could increase the U.S. federal income tax, interest, and/or penalties otherwise borne by us in the event of a U.S. federal income tax audit of a subsidiary partnership (such as our operating partnership).
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for U.S. 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 stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. We may elect to pay dividends on our Common Stock in cash or a combination of cash and shares of securities as permitted under U.S. federal income tax laws governing REIT distribution requirements. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge mortgage securities and related borrowings by requiring us to limit our income and assets in each year from certain hedges, together with any other income not generated from qualified real estate assets, to no more than 25% of our gross income. In addition, we must limit our aggregate income from nonqualified hedging transactions, from our provision of services, and from other non-qualifying sources to no more than 5% of our annual gross income. As a result, we may have to limit our use of advantageous hedging techniques. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. However, for transactions that we enter into to protect against interest rate risks on debt incurred to acquire qualified REIT assets and for which we identify as hedges for tax purposes, any associated hedging income is excluded from the 95% income test and the 75% income test applicable to a REIT. In addition, similar rules apply to income from positions that primarily manage risk with respect to a prior hedge entered into by a REIT in connection with the extinguishment or disposal (in whole or in part) of the liability or asset related to such prior hedge, to the extent the new position qualifies as a hedge or would so qualify if the hedged position were ordinary property. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the amount of income in excess of those limitations multiplied by a fraction intended to reflect our profitability. If we fail to satisfy the REIT gross income tests, unless our failure was due to reasonable cause and not due to willful neglect such that a REIT “savings clause” applied, we could lose our REIT status for U.S. federal income tax purposes.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
 
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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 20% of the value of our total assets can be represented by securities of one or more TRSs, and no more than 25% of the value of our total assets can be represented by certain publicly offered REIT debt instruments.
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 suffering 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 our 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 our 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 of securities as permitted under U.S. federal income tax laws governing REIT distribution requirements. To the extent that we make distributions in excess of our current and accumulated earnings and profits (as determined for U.S. 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.
We may in the future choose to pay taxable dividends in our shares of our Common Stock instead of cash, in which case stockholders may be required to pay income taxes in excess of the cash dividends they receive.
We may distribute taxable dividends that are payable in cash and Common Stock at the election of each stockholder, subject to certain limitations, including that the cash portion be at least 20% of the total distribution (10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020).
If we make 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 taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the shares of 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 shares of Common Stock. In addition, 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.
 
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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. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or 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 stockholder return received by our stockholders.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our securities.
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. It is possible that future legislation would result in a REIT having fewer advantages, and it could become more advantageous for a company that invests in real estate to be treated, for U.S. federal income tax purposes, as a corporation.
If Braemar failed to qualify as a REIT for 2013, it would significantly affect our ability to maintain our REIT status.
For U.S. federal income tax purposes, we recorded a gain of approximately $145.7 million as a result of the spin-off of Braemar in November 2013. If Braemar qualified for taxation as a REIT for 2013, that gain was qualifying income for purposes of our 2013 REIT income tests. If, however, Braemar failed to qualify as a REIT for 2013, that gain would be non-qualifying income for purposes of the 75% gross income test. Although Braemar covenanted in the Separation and Distribution Agreement to use reasonable best efforts to qualify as a REIT in 2013, no assurance can be given that it so qualified. If Braemar failed to qualify, we would have failed our 2013 REIT income tests, which would either result in our loss of our REIT status for 2013 and the following four taxable years or result in a significant tax in 2013 that has not been accrued or paid and thereby would materially negatively impact our business, financial condition and potentially impair our ability to continue operating in the future.
Your investment in our securities has various federal, state, and local income tax risks that could affect the value of your investment.
We strongly urge you to consult your own tax advisor concerning the effects of federal, state, and local income tax law on an investment in our securities because of the complex nature of the tax rules applicable to REITs and their stockholders.
Our failure to qualify as a REIT would potentially give rise to a claim for damages from Braemar.
In connection with the spin-off of Braemar, which was completed in November 2013, we represented in the Separation and Distribution Agreement with Braemar that we have no knowledge of any fact or
 
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circumstance that would cause us to fail to qualify as a REIT. In the event of a breach of this representation, Braemar may be able to seek damages from us, which could have a significantly negative effect on our liquidity and results of operations.
Declines in the values of our investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act.
If the market value or income potential of real estate-related investments declines as a result of increased interest rates or other factors, we may need to increase our real estate-related investments and income or liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from the Investment Company Act of 1940 (the “Investment Company Act”). If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets that we may own. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.
Risks Related to Our Corporate Structure
Our Charter, the partnership agreement of our operating partnership and Maryland law contain 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 (i) 9.8% of the lesser of the total number or value (whichever is more restrictive) of the outstanding shares of our Common Stock or (ii) 9.8% of the total number or value (whichever is more restrictive) 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 any class or series of our stock by an individual or entity could nevertheless cause that individual or entity to own constructively in excess of 9.8% of a class or series of outstanding stock, and thus be subject to our Charter’s ownership limit. Any attempt to own or transfer shares of our 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.
Our Board of Directors may create and issue a class or series of Common Stock or preferred stock without stockholder approval.
Our Charter authorizes our Board of Directors to issue Common Stock or preferred stock in one or more classes and to establish the preferences and rights of any class of Common Stock or preferred stock issued. These actions can be taken without obtaining stockholder approval. Our issuance of additional classes of Common Stock or preferred stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.
Certain provisions in the partnership agreement of our operating partnership may delay or prevent unsolicited acquisitions of us.
Provisions in the partnership agreement of 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
 
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the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances.
Because provisions contained in Maryland law and our Charter may have an anti-takeover effect, investors may be prevented from receiving a “control premium” for their shares.
Provisions contained in our Charter and Maryland general corporation law may have effects that delay, defer, or prevent a takeover attempt, which may prevent stockholders from receiving a “control premium” for their shares. For example, these provisions may defer or prevent tender offers for our Common Stock or purchases of large blocks of our Common Stock, thereby limiting the opportunities for our stockholders to receive a premium for their Common Stock over then-prevailing market prices.
These provisions include the following:

The ownership limit in our Charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our Common Stock or any class of our preferred stock without our permission.

Our Charter authorizes our Board of Directors to issue Common Stock or preferred stock in one or more classes and to establish the preferences and rights of any class of Common Stock or preferred stock issued. These actions can be taken without soliciting stockholder approval. Our Common Stock and preferred stock issuances could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests.
Maryland statutory law provides that an act of a director relating to or affecting an acquisition or a potential acquisition of control of a corporation may not be subject to a higher duty or greater scrutiny than is applied to any other act of a director. Hence, directors of a Maryland corporation by statute are not required to act in certain takeover situations under the same standards of care, and are not subject to the same standards of review, as apply in Delaware and other corporate jurisdictions.
Certain other provisions of Maryland law, if they became applicable to us, could inhibit changes in control.
Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us 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 or a “control premium” for their shares or inhibit a transaction that might otherwise be viewed as being in the best interest of our stockholders. These provisions include:

“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 stockholder voting requirements on these business combinations, unless certain fair price requirements set forth in the MGCL are satisfied; 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 outstanding “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.
In addition, Subtitle 8 of Title 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under the Exchange Act and at least three independent directors to elect to be subject, notwithstanding any contrary provision in the charter or bylaws, to any or all of the following five provisions: a classified board; a two-thirds stockholder vote requirement for removal of a director; a requirement that the number of directors be fixed only by vote of the directors; a requirement that a vacancy on the Board of Directors be filled only by the remaining directors and for the remainder of the full term of the class of
 
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directors in which the vacancy occurred; and a requirement that the holders of at least a majority of all votes entitled to be cast request a special meeting of stockholders.
Our Charter opts out of the business combination/moratorium provisions and control share provisions of the MGCL and prevents us from making any elections under Subtitle 8 of the MGCL. Because these provisions are contained in our Charter, they cannot be amended unless the Board of Directors recommends the amendment and the stockholders approve the amendment. Any such amendment would require the affirmative vote of two-thirds of the outstanding voting power of our Common Stock.
We depend on our operating partnership and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to the obligations of our operating partnership and its subsidiaries, which could adversely affect our ability to make distributions to our stockholders.
We have no business operations of our own. Our only significant asset is and will be the general and limited partnership interests of our operating partnership. We conduct, and intend to continue to conduct, all of our business operations through our operating partnership. Accordingly, our only source of cash to pay our obligations is distributions from our operating partnership and its subsidiaries of their net earnings and cash flows. We cannot assure our stockholders that our operating partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our operating partnership’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our operating partnership and its subsidiaries liabilities and obligations have been paid in full.
Offerings of debt securities, which would be senior to our Common Stock and any preferred stock upon liquidation, or equity securities, which would dilute our existing stockholders’ holdings and could be senior to our Common Stock for the purposes of dividend distributions, may adversely affect the market price of our Common Stock and any preferred stock.
We may attempt to increase our capital resources by making additional 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 or preferred units and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of shares of preferred stock or Common Stock. Furthermore, 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 or preferred stock or both. Our preferred stock or preferred units could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend 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.
Securities eligible for future sale may have adverse effects on the market price of our securities.
We cannot predict the effect, if any, of future sales of securities, or the availability of securities for future sales, on the market price of our outstanding securities. Sales of substantial amounts of Common Stock, or the perception that these sales could occur, may adversely affect prevailing market prices for our securities.
We also may issue from time to time additional shares of our securities or units of our operating partnership in connection with the acquisition of properties and we may grant additional demand or piggyback registration rights in connection with these issuances. Sales of substantial amounts of our securities or the perception that such sales could occur may adversely affect the prevailing market price for our securities or may impair our ability to raise capital through a sale of additional debt or equity securities.
 
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An increase in market interest rates may have an adverse effect on the market price of our securities.
A factor investors may consider in deciding whether to buy or sell our securities is our dividend rate as a percentage of our share or unit price relative to market interest rates. If market interest rates increase, prospective investors may desire a higher dividend or interest rate on our securities or seek securities paying higher dividends or interest. The market price of our securities is likely based on the earnings and return that we derive from our investments, income with respect to our properties, and our related distributions to stockholders and not necessarily from the market value or underlying appraised value of the properties or investments themselves. As a result, interest rate fluctuations and capital market conditions can affect the market price of our securities. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common or preferred stock could decrease because potential investors may require a higher dividend yield on our common or preferred stock as market rates on interest-bearing securities, such as bonds, rise. In addition, rising interest rates would result in increased interest expense on our variable-rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay dividends.
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:

amend or revise at any time our dividend policy with respect to our Common Stock or preferred stock (including by eliminating, failing to declare, or significantly reducing dividends on these securities);

terminate our advisor under certain conditions pursuant to the advisory agreement, subject to the payment of a termination fee;

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, subject to the limitations and restrictions provided in our advisory agreement and mutual exclusivity agreement;

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 (subject to disinterested director approval);

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

determine that it is not 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.
The ability of our Board of Directors to change our major policies without the consent of stockholders may not be in our stockholders’ interest.
 
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Our Board of Directors determines our major policies, including policies and guidelines relating to our acquisitions, leverage, financing, growth, operations and distributions to stockholders. Our Board of Directors may amend or revise these and other policies and guidelines from time to time without the vote or consent of our stockholders, subject to certain limitations and restrictions provided in our advisory agreement. Accordingly, our stockholders will have limited control over changes in our policies and those changes could adversely affect our financial condition, results of operations, the market price of our stock and our ability to make distributions to our stockholders.
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 to have been material to the cause of action. Our Charter requires us to indemnify our directors and officers and to advance expenses prior to the final disposition of a proceeding 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, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we are generally obligated to fund the defense costs incurred by our directors and officers.
Future issuances of securities, including our Common Stock and preferred stock, could reduce existing investors’ relative voting power and percentage of ownership and may dilute our share value.
Our Charter authorizes the issuance of up to 400,000,000 shares of Common Stock and 50,000,000 shares of preferred stock. As of July 17, 2020, we had 10,475,199 shares of our Common Stock issued and outstanding, 2,389,393 shares of our Series D Cumulative Preferred Stock, 4,800,000 shares of our Series F Cumulative Preferred Stock, 6,200,000 shares of our Series G Cumulative Preferred Stock, 3,800,000 shares of our Series H Cumulative Preferred Stock, and 5,400,000 shares of our Series I Cumulative Preferred Stock. Accordingly, we may issue up to an additional 389,524,801 shares of Common Stock and 27,410,607 shares of preferred stock.
Future issuances of Common Stock or preferred stock could decrease the relative voting power of our Common Stock or preferred stock and may cause substantial dilution in the ownership percentage of our then-existing holders of common or preferred stock. Future issuances may have the effect of reducing investors’ relative voting power and/or diluting the net tangible book value of the shares held by our stockholders, and might have an adverse effect on any trading market for our securities. Our Board of Directors may designate the rights, terms and preferences of our authorized but unissued common shares or preferred shares at its discretion, including conversion and voting preferences without stockholder approval.
 
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SPECIAL FACTORS
Background of the Exchange Offers and the Consent Solicitation
In light of the downturn in business and leisure travel in general, and on our business in particular, caused by the COVID-19 pandemic, the occupancy rates of, and cash flows generated by, our hotels decreased precipitously beginning in March 2020 and rendered us unable to continue to pay interest and principal on nearly all of our property-level indebtedness in the ordinary course. In the first quarter of 2020, in order to preserve liquidity, the Board of Directors suspended the payment of dividends on the Common Stock and we began soliciting nearly all of our property-level lenders to enter into forbearance agreements with respect to our property-level indebtedness. In the second quarter of 2020, the Company announced that it would not pay dividends on its Preferred Stock. Since then, the unpaid dividends on the Preferred Stock have accumulated and, for so long as they are not paid in cash, will continue to accumulate at a rate of 8.45% per annum for the Series D Preferred Stock, 7.375% per annum for the Series F Preferred Stock, 7.375% per annum for the Series G Preferred Stock, 7.50% per annum for the Series H Preferred Stock and 7.50% per annum for the Series I Preferred Stock, in each case compounded quarterly. As of July 17, 2020, the Company had approximately $10,644,238 in accumulated and unpaid preferred dividends, approximately $1,261,838 of which related to the Series D Preferred Stock, $2,212,320 of which related to the Series F Preferred Stock, $2,857,580 of which related to the Series G Preferred Stock, $1,781,250 of which related to the Series H Preferred Stock and $2,531,250 of which related to the Series I Preferred Stock. As of July 15, 2020, the aggregate liquidating preference of the Preferred Stock, excluding accumulated and unpaid dividends, was $429,734,825.
Based on the Company’s financial outlook and the lack of clarity with respect to how long it will take for the hotel industry in general, and the Company’s operations in particular, to return to pre-COVID-19 occupancy and cash flow levels, the Company believes it to be unlikely that it will have cash available in the foreseeable future to pay its accumulated and unpaid dividends and to satisfy the Company’s future dividend requirement on its Preferred Stock, or to redeem its Preferred Stock, which is perpetual and does not have a maturity date. Further, until all accumulated and unpaid Preferred Stock dividends are paid, the Company will be unable to pay any dividends on its Common Stock.
The following provides a summary of the future di