Redeemable Noncontrolling Interests in Operating Partnership

6 Months Ended

Jun. 30, 2021

Redeemable Noncontrolling Interests in Operating Partnership

Redeemable noncontrolling interests in the operating partnership represents the limited partners’ proportionate share of equity in earnings/losses of the operating partnership, which is an allocation of net income/loss attributable to the common unit holders based on the weighted average ownership percentage of these limited partners’ common units of limited partnership interest in the operating partnership (the “common units”) and the units issued under our Long-Term Incentive Plan (the “LTIP units”) that are vested. Each common unit may be redeemed for either cash or, at our sole discretion, up to one share of our REIT common stock, which is either: (i) issued pursuant to an effective registration statement; (ii) included in an effective registration statement providing for the resale of such common stock; or (iii) issued subject to a registration rights agreement.

LTIP units, which are issued to certain executives and employees of Ashford LLC as compensation, generally have vesting periods ranging from three years to five years. Additionally, certain independent members of the board of directors have elected to receive LTIP units as part of their compensation, which are fully vested upon grant. Upon reaching economic parity with common units, each vested LTIP unit can be converted by the holder into one common unit which can then be redeemed for cash or, at our election, settled in our common stock. An LTIP unit will achieve parity with the common units upon the sale or deemed sale of all or substantially all of the assets of the operating partnership at a time when our stock is trading at a level in excess of the price it was trading on the date of the LTIP issuance. More specifically, LTIP units will achieve full economic parity with common units in connection with (i) the actual sale of all or substantially all of the assets of the operating partnership or (ii) the hypothetical sale of such assets, which results from a capital account revaluation, as defined in the partnership agreement, for the operating partnership.

The compensation committee of the board of directors of the Company may authorize the issuance of Performance LTIP units to certain executive officers and directors from time to time. The award agreements provide for the grant of a target number of Performance LTIP units that will be settled in common units of Ashford Trust OP, if, when and to the extent the applicable vesting criteria have been achieved following the end of the performance and service period.

With respect to the 2019 and 2020 award agreements, the number of Performance LTIP units actually earned may range from 0% to 200% of target based on achievement of specified absolute and relative total stockholder returns based on the formulas determined by the Company’s compensation committee on the grant date. The performance criteria for the Performance LTIP units are based on market conditions under the relevant literatures. The corresponding compensation cost is recognized ratably over the service period for the award as the service is rendered, based on the grant date fair value of the award, regardless of the actual outcome of the market condition. During the six months ended June 30, 2021, approximately 58,000 performance-based LTIP units were canceled due to the market condition criteria not being met. As a result there was a claw back of the previously declared dividends in the amount of $454,000.

With respect to the 2021 award agreements, the criteria for the Performance LTIP units are based on performance conditions and market conditions under the relevant literature. The corresponding compensation cost is recognized, based on the grant date fair value of the award, ratably over the service period for the award as the service is rendered, which may vary from period to period, as the number of performance grants earned may vary based on the estimated probable achievement of certain performance targets (performance conditions). The number of Performance LTIP Units to be earned based on the applicable performance conditions is determined upon the final vesting date. The initial calculation of the Performance LTIP units earned can range from 0% to 200% of target, which is further subjected to a specified absolute total stockholder return modifier (market condition) based on the formulas determined by the Company’s compensation committee on the grant date. This will result in an adjustment (75% to 125%) of the initial calculation of the number of performance awards earned based on the applicable performance targets resulting in a final award calculation ranging from 0% to 250% of the target amount.

As of June 30, 2021, there were approximately 129,000 Performance LTIP units, representing 200% of the target number granted for the 2019 and 2020 grants and 250% for the 2021 grants outstanding.

The Company issued equity awards in the first quarter of 2021, a substantial majority of which were issued subject to stockholder approval of the Company’s 2021 Stock Incentive Plan. Under the applicable accounting literature, these awards are not accounted for until stockholder approval is obtained. Stockholder approval was obtained on May 12, 2021.

In May 2021, approximately 122,000 Performance LTIP units with a fair value of approximately $2.7 million and a vesting period of three years were granted.

In May 2021, approximately 15,000 LTIP units were issued to independent directors with a fair value of approximately $397,000, which vested immediately upon grant and have been expensed during the three and six months ended June 30, 2021.

In May 2021, approximately 54,000 LTIP units with a fair value of approximately $1.4 million and a vesting period of three years were granted.

As of June 30, 2021, we have issued a total of approximately 322,000 LTIP and Performance LTIP units, net of Performance LTIP cancellations. All LTIP and Performance LTIP units other than approximately 17,000 units (5,000 of which are Performance LTIP units) have reached full economic parity with, and are convertible into, common units upon vesting.

The following table presents the common units redeemed and the fair value upon redemption (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Common units converted to stock	1		—		1		196
Fair value of common units converted	$	41	$	—	$	41	$	959

The following table presents the redeemable noncontrolling interest in Ashford Trust and the corresponding approximate ownership percentage:


	June 30, 2021			December 31, 2020
Redeemable noncontrolling interests (in thousands)	$	28,906		$	22,951
Cumulative adjustments to redeemable noncontrolling interests (1) (in thousands)	193,324			186,763
Ownership percentage of operating partnership	1.36		%	8.51		%

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(1) Reflects the excess of the redemption value over the accumulated historical costs.

We allocated net income (loss) to the redeemable noncontrolling interests and declared aggregate cash distributions to holders of common units and holders of LTIP units, as presented in the table below (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Allocated net (income) loss to the redeemable noncontrolling interests	$	956	$	37,350	$	3,227	$	55,021

Performance LTIP dividend claw back upon cancellation	—		—		(454)		(1,401)