10-K 1 inlandamerican1231201310-k.htm 10-K Inland American 12.31.2013 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
 
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM            TO          
COMMISSION FILE NUMBER: 000-51609
 
 
 
 
 
 
Inland American Real Estate Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
34-2019608
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
2901 Butterfield Road, Oak Brook, Illinois
 
60523
(Address of principal executive offices)
 
(Zip Code)
630-218-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $0.001 par value per share
(Title of Class)
 
 
 
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).
Large accelerated filer
¨
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
x
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
There is no established market for the registrant’s shares of common stock. The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2013 (the last business day of the registrant’s most recently completed second quarter) was approximately $6,210,793,798, based on the estimated per share value of $6.93, as established by the registrant on December 19, 2012.
As of March 11, 2014, there were 915,257,302 shares of the registrant’s common stock outstanding.
The registrant incorporates by reference portions of its Definitive Proxy Statement for the 2014 Annual Meeting of Stockholders, which is expected to be filed no later than April 30, 2014, into Part III of this Form 10-K to the extent stated herein.



INLAND AMERICAN REAL ESTATE TRUST, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
This Annual Report on Form 10-K includes references to certain trademarks. Courtyard by Marriott®, Marriott®, Marriott Suites®, Residence Inn by Marriott® and SpringHill Suites by Marriott® trademarks are the property of Marriott International, Inc. (“Marriott”) or one of its affiliates. Doubletree®, Embassy Suites®, Hampton Inn®, Hilton Garden Inn®, Hilton Hotels® and Homewood Suites by Hilton® trademarks are the property of Hilton Hotels Corporation (“Hilton”) or one or more of its affiliates. Hyatt Place® and Andaz trademarks are the property of Hyatt Corporation (“Hyatt”). Intercontinental Hotels ® trademark is the property of IHG. Fairmont Hotels and Resorts is a trademark. The Aloft service name and the Westin service name are the property of Starwood Hotels and Resorts Worldwide, Inc. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above-referenced terms are used.
 




PART I

Item 1. Business
General
References to "we", "our", "us", and "the Company" are references to Inland American Real Estate Trust, Inc. and our business and operations conducted through our directly or indirectly owned subsidiaries.
Inland American Real Estate Trust, Inc. owns, manages, acquires and develops a diversified portfolio of commercial real estate located throughout the United States. In addition, we own assets and properties in development through various joint ventures with various controlling and noncontrolling interests, as well as investments in marketable securities and other assets. We were incorporated in October 2004 as a Maryland corporation and have elected to be taxed, and currently qualify, as a real estate investment trust (“REIT”) for federal tax purposes.
Our strategic focus has been to realign our diversified portfolio in three specific asset classes - retail, lodging and student housing. As of December 31, 2013, our portfolio was comprised of 277 properties representing 17.0 million square feet of retail space, 19,337 hotel rooms, 8,290 student housing beds and and 7.3 million square feet of non-core space, which consists primarily of office and industrial properties.

Strategy and Objectives
Our objective is to deliver financially rewarding results to our stockholders through thoughtful capital rotation and investment. We intend to achieve this objective by continuing to execute on our portfolio strategy, focusing our diversified assets in three specific real estate asset classes - retail, lodging and student housing. We believe this strategy presents the best opportunity to capitalize on current market trends in commercial real estate and realize income growth in these sectors.
A component of our strategy is to improve the overall quality of our retail, lodging and student housing segments for long-term growth through selective asset acquisition and sales. We continue to use our expertise to capitalize on opportunities in the real estate industry. We believe our ability to identify and react to investment opportunities is one of our biggest strengths. This strategy will take time as we dispose of less strategic assets and rotate capital into our targeted segments. Our focus has been, and will continue to be, maximizing stockholder value over the long-term.
From time to time, as part of our long-term corporate goal of enhancing stockholder value, we have explored, and will continue to explore, potential strategic transactions including acquisitions and divestitures as well as ways to create liquidity for our stockholders. As previously disclosed by us, these potential strategic transactions may take many forms, including listing our shares on a national securities exchange, a spin-off of an entity owning one of our property segments, an initial public offering or listing of this entity on a national securities exchange, a merger with another existing REIT, or the sale of all, or substantially all, of one or more of our property segments. We currently have no definitive plan or proposal to conduct any specific strategic transaction. We may decide to engage in one or more such transactions in the future, if, among other things, our board determines that any such transactions are in the best interest of the Company and market conditions are favorable.
During the execution of our strategy, we will focus on maintaining a stable income stream to provide a sustainable monthly distribution to our stockholders.
Our three objectives in the execution of our strategy are:

Sustaining a monthly stockholder distribution while maintaining capital preservation
Tailoring our portfolio to lodging, student housing and multi-tenant retail by expanding and enhancing these portfolios
Positioning for the potential for multiple liquidity events by segment type

2013 Highlights
Distributions
We paid a monthly cash distribution to our stockholders which totaled in the aggregate $449.3 million for the year ended December 31, 2013, which was equal to $0.50 per share for 2013, assuming that a share was outstanding the entire year. The distributions paid for the year ended December 31, 2013 were funded from cash flow from operations, distributions from unconsolidated joint ventures and gains on sale of properties.

1


Investing Activities
Our acquisition and disposition activities highlight our move to divest of non-strategic assets and redeploy the capital into our long-term strategic segments: retail, lodging and student housing. We acquired fourteen lodging properties totaling 3,303 rooms for $963.3 million. We acquired three student housing properties consisting of 1,409 beds for $161.1 million. In addition, we acquired four retail properties consisting of 483,753 square feet for $92.3 million. As part of our strategy to realign our asset segments, we sold 313 properties for a gross disposition price of $2.0 billion, including 259 bank branches, 48 non-core properties, three multi-tenant retail properties, and three hotels. Additionally, we contributed 14 retail properties, including one of the properties we acquired this year, to the IAGM Retail Fund I, LLC joint venture for a gross disposition price of $443.7 million.
On August 8, 2013, we entered into a purchase agreement to sell our net lease assets, consisting of 294 retail, office, and industrial properties in a transaction valued at approximately $2.3 billion, including the assumption of approximately $795.3 million of debt and repayment by us of approximately $360.9 million of debt. In accordance with the terms of the purchase agreement, the buyer elected to “kick-out” of the transaction 13 properties valued at approximately $180.1 million. Excluding the “kicked out” properties, the transaction is valued at approximately $2.1 billion. As of December 31, 2013, we closed on the first two tranches of the net lease portfolio consisting of 57 properties for a disposition price of $669.7 million. The remaining 224 properties are expected to be sold at a gain through multiple closings during the first half of 2014. We have classified the remaining properties as held for sale on the consolidated balance sheet as of December 31, 2013 and consequently the operations are reflected as discontinued operations on the consolidated statements of operations and other comprehensive income for the years ended December 31, 2013, 2012 and 2011. On January 8, 2014, February 21, 2014, and March 10, 2014 we closed on three more tranches of the net lease portfolio consisting of 30, 28, and 151 properties for a disposition price of $55.3, $451.9, and $278.6 million, respectively.
Financing Activities
We obtained a senior unsecured credit facility consisting of a $300 million senior unsecured revolving line of credit and a $200 million unsecured term loan. The credit facility requires monthly interest-only payments at a rate of LIBOR plus a margin ranging from 1.60% to 2.45% on the outstanding balance of the revolver depending on leverage levels, and at a rate of LIBOR plus a margin ranging from 1.50% to 2.45% on the outstanding balance of the term loan depending on leverage levels. As of December 31, 2013, we had $299.8 million available under the revolving line of credit and had borrowed the full amount of the term loan. As of December 31, 2013, the interest rates of the revolving line of credit and unsecured term loan were 1.60% and 1.67% per annum, respectively. The facility will assist us in bridging the proceeds from disposing of non-strategic assets and acquiring retail, lodging and student housing assets.
We successfully refinanced or paid off our 2013 maturities of approximately $882.9 million and placed debt of approximately $700.8 million on new and existing properties. We were able to obtain favorable rates while still maintaining what we believe is a manageable debt maturity schedule for future years. As of December 31, 2013, we had mortgage debt of approximately $4.7 billion and have a weighted average interest rate of 5.09% per annum. Our mortgage debt maturities for 2014 are $418.5 million with a weighted average interest rate of 3.94%.
Operating Results
We experienced an increase in our net operating income due to organic growth in our lodging and student housing segments as our same store net operating income results increased 6.8% and 5.5%, respectively, for the year ended December 31, 2013 compared to 2012. These increases are due to higher occupancy and RevPAR increases in the lodging segment and rental rate increases in our student housing segment. Our retail segments remained unchanged, exhibiting stable occupancy and contractual rental rates. Our non-core segment was slightly down as a result of re-leasing vacant space at decreased rental rates.
We also experienced an increase over the prior year in our total net operating income of 28.3% and 78.8% in the lodging and student housing segments, respectively. The addition of 21 lodging and 8 student housing properties (including properties fully placed in service from construction in progress) since January 1, 2012 contributed $76.3 million and $20.1 million, respectively, of net operating income for the year ended December 31, 2013.
The following table represents our same store net operating income for the years ended December 31, 2013 and 2012. Same store properties are properties we have owned and operated for the same period during each year. Net operating income is calculated in Item 7 and reconciled to U.S. generally accepted accounting principles ("GAAP") net income in Item 8, Note 13 of this Annual Report on Form 10-K.

2


 
2013
Net Operating Income
 
2012
Net Operating Income
 
Increase (Decrease)
 
Increase (Decrease)
 
2013
Average Economic
Occupancy (a)
 
2012
Average Economic
Occupancy (a)
Retail
$
179,802

 
$
180,658

 
$
(856
)
 
(0.5
)%
 
91
%
 
92
%
Lodging
195,964

 
183,465

 
12,499

 
6.8
 %
 
73
%
 
73
%
Student Housing
15,342

 
14,543

 
799

 
5.5
 %
 
93
%
 
91
%
Non-core
74,719

 
77,127

 
(2,408
)
 
(3.1
)%
 
89
%
 
90
%
 
$
465,827

 
$
455,793

 
$
10,034

 
2.2
 %
 
 
 
 
(a) Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by that tenant of the area being leased.
In 2014, we expect similar increases in operating results compared to 2013 in our lodging and student housing portfolios due to the growth projected in these segments. As occupancy rates increase close to peak levels in lodging and student housing, the ability to increase rooms rates and rental rates, respectively, will help grow our revenue for each segment in 2014. We believe that our stable occupancy in our retail portfolio will result in consistent operating performance in 2014. In addition, we expect to see similar or slightly decreased operating performance in our non-core portfolio in 2014.
Segment Data
Our business segments are retail, lodging, student housing and non-core. We evaluate segment performance primarily based on net operating income. Net operating income of the segments does not include interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest and other investment income from corporate investments. The non-segmented assets consist of our cash and cash equivalents, investment in marketable securities, construction in progress, investment in unconsolidated entities and notes receivable. Information related to our business segments, including a measure of profits or loss and revenues from external customers for each of the last three fiscal years and total assets for each of the last two fiscal years, is set forth in Note 13 to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
Significant Tenants
For the year ended December 31, 2013, we generated approximately 9% of our rental revenue (excluding lodging and student housing) from continuing operations from two properties leased to one tenant, AT&T, Inc. We also own a third property that is leased to AT&T, Inc., but the property is classified as held for sale as of December 31, 2013.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with the tax year ended December 31, 2005. Because we qualify for taxation as a REIT, we generally will not be subject to federal income tax on taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, without the benefit of certain relief provisions, we will be subject to federal and state income tax on our taxable income at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income, property or net worth, respectively, and to federal income and excise taxes on our undistributed income.
Competition
The commercial real estate market is highly competitive. We compete for tenants in all of our markets with other owners and operators of commercial properties. We compete based on a number of factors that include location, rental rates, security, suitability of the property’s design to tenants’ needs and the manner in which the property is operated and marketed. The number of competing properties in a particular market could have a material effect on a property’s occupancy levels, rental rates and operating income.

We compete with many third parties engaged in real estate investment activities including other REITs, other REITs sponsored by our sponsor, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. There are also other REITs with investment objectives similar to ours and others may be organized in the future. In addition, these same entities seek financing through the same channels that we do. Therefore, we compete for funding in a market where funds for real estate investment may decrease, or grow less than the underlying demand.

3


Employees
As of December 31, 2013, we have 201 full-time individuals employed by our student housing subsidiaries.
As of December 31, 2013, we had entered into a business management agreement with Inland American Business Manager & Advisor, Inc. pursuant to which it served as our business manager, with responsibility for overseeing and managing our day-to-day operations. We had also entered into property management agreements with each of our property managers. We had paid fees to our business manager and our property managers in consideration for the services they perform for us pursuant to these agreements. Except as noted below, we had also reimbursed these entities for the expenses they incur in performing services for us including the compensation expenses for persons providing services to us.
As of December 31, 2013, we did not employ our executive officers and they did not receive any compensation from us for their services as such officers. Our executive officers were officers of one or more of The Inland Group, Inc.’s affiliated entities, including our business manager, and were compensated by these entities, in part, for their services rendered to us. We did not reimburse the business manager for any compensation paid to persons serving as one of our executive officers or as an executive officer of the business manager or property managers.

Subsequently, on March 12, 2014, we began the process of becoming fully self-managed by terminating our business management agreement, hiring all of our business manager’s employees, and acquiring the assets of our business manager necessary to perform the functions previously performed by the business manager. As a first step towards internalizing our property managers, we hired certain of their employees; assumed responsibility for performing certain significant property management functions; and amended our property management agreements to reduce our property management fees as a result of our assumption of such responsibilities. As the second step, on December 31, 2014, we expect to terminate our property management agreements, hire the remaining property manager employees and acquire the assets necessary to conduct the remaining functions performed by our property managers. As a consequence, beginning January 1, 2015, we expect to become fully self-managed. We will not pay an internalization fee or self-management fee in connection with these self-management transactions. These self-management transactions immediately eliminate the management and advisory fees paid to the business manager and at the end of 2014, we expect to eliminate the fees paid to our property managers when we terminate the property management agreements. As part of the self-management transactions, we agreed to reimburse our business manager and property managers for certain transaction and employee related expenses and directly retain affiliates of The Inland Group, Inc. for IT services, customer service and certain back-office services that were provided to us and managed by our business manager prior to the termination of the business management agreement.
Conflicts of Interest
Our governing documents require a majority of our directors to be independent. Further, any transactions between The Inland Group, Inc. or its affiliates, including our business manager and property managers, and us must be approved by a majority of our independent directors.
Environmental Matters
Compliance with federal, state and local environmental laws has not had a material adverse effect on our business, assets, or results of operations, financial condition and ability to pay distributions, and we do not believe that our existing portfolio will require us to incur material expenditures to comply with these laws and regulations. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on our properties.
Seasonality
The lodging segment is seasonal in nature, reflecting higher revenue and operating income during the second and third quarters. This seasonality can be expected to cause fluctuations in our net operating income for the lodging segment. None of our other segments are seasonal in nature.

4


Access to Company Information
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available, free of charge, by responding to requests addressed to our customer relations group, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports on our website, www.inland-american.com. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.
Certifications
We have filed with the Securities and Exchange Commission the principal executive officer and principal financial officer certifications required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which are attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.

5



Item 1A. Risk Factors
The occurrence of any of the risks discussed below could have a material adverse effect on our business, financial condition, results of operations and ability to pay distributions to our stockholders.
Risks Related to Our Business
Disruptions in the financial markets or economic conditions could adversely affect our ability to refinance or secure additional debt financing at attractive terms.
Credit markets are subject to rapid changes from macro economic factors, including rising interest rates, perceptions of the overall health in the US economy and real estate in particular, and regulatory environment in which we, our lenders and tenants operate.
In addition, disruptions in the financial markets or economic conditions may negatively impact commercial real estate fundamentals which could have various negative impacts on the value of our investments including:
a decrease in the values of our investments in commercial properties, below the amounts paid for these investments; or
a decrease in revenues from our properties, due to lower occupancy and rental rates, which may make it more difficult for us to pay distributions or meet our debt service obligations on debt financing.

Our ongoing strategy depends, in part, upon future acquisitions, and we may not be successful in identifying and consummating these transactions.
Our long-term business strategic plan is to refine our diversified portfolio of assets and to focus on the retail, lodging, and student housing sectors. As we continue to execute on this strategy, we plan to rotate capital out of our other asset classes - such as multi-family, office and industrial - to invest in, enhance and expand our strategic holdings in the retail, lodging, and student housing sectors. There is no assurance we will be able to sell assets at acceptable prices or identify suitable replacement assets on satisfactory terms, if at all. We may also face delays in reinvesting net sales proceeds in new assets which would impact the return we earn on our assets.
We face significant competition for attractive investment opportunities from an indeterminate number of other real estate investors, including investors with significant capital resources such as domestic and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated.
In light of current market conditions and real estate values, we may face significant competition to acquire stabilized properties, or have to accept lease-up risk associated with properties that have lower occupancy. As market conditions and real estate values recover, more properties may become available for acquisition, but we can provide no assurances that these properties will meet our investment objectives or that we will be successful in acquiring these properties. If we are unable to acquire sufficient debt financing at suitable rates or at all, we may be unable to acquire as many additional properties as we anticipate.
Our ongoing strategy involves the selling of properties; however, we may be unable to sell a property at acceptable terms and conditions, if at all.
As we execute on our long-term strategy we will rotate capital out of certain asset classes, such as multi-family, office and industrial to reinvest into retail, lodging or student housing. Besides executing on our strategy, it may make economic sense to sell properties in any asset class when we believe the value of the leases in place at a property will significantly decline over the remaining lease term, or where we conclude that the property has limited or no equity value with a near-term debt maturity, or when a property has equity but the projected returns do not justify further investment, or when the equity in a property can be redeployed in the portfolio in order to achieve better returns or strategic goals. As we engage to sell these properties, general economic conditions along with property specific issues, such as vacancies, lease terminations and debt defeasance, may negatively affect the value of our properties and therefore reducing our return on the investment or preventing us from selling the property on acceptable terms. Real estate investments often cannot be sold quickly. As a result, economic conditions may prevent potential purchasers from obtaining financing on acceptable terms, if at all, thereby delaying or preventing our ability to sell our properties.

6



We may not be successful in identifying, executing and completing strategic alternatives, including liquidity events, with respect to any asset segment or in providing liquidity options to our stockholders.
Our long-term business strategic plan is to refine our diversified portfolio of assets and to focus on the retail, lodging, and student housing sectors. One of our objectives in connection with this plan is to explore various strategic alternatives, position the Company for possible multiple liquidity events by segment and provide liquidity options for our stockholders, such as sales, mergers, spin-offs, initial public offerings, listing or other capital markets or merger and acquisition transactions. The execution and consummation as well as the timing of any such transactions are subject to a number of known and unknown risks that are difficult to predict and many of which are out of our control. Among the factors that could impact our ability to successfully identify, execute and complete such transactions and provide liquidity options for our stockholders are:
macro economic factors;
economic, financial and investment conditions;
the state of the equity and debt capital markets;
the state of the retail, lodging and student housing industries and where in the “cycle” the relevant industry is at the time the Company is in a position to effectuate a strategic transaction;
changes or increases in interest rates and availability of financing;
competition;
the need and our ability to effectuate internal restructuring transactions in order to allow the Company to execute on and complete one or more strategic alternatives;
our ability to obtain required lender and other third party consents and the timing of such consents;
refinancing considerations;
the existence of interested buyers and potential merger candidates;
tax considerations; and
the existence of pending or threatened legal or regulatory proceedings against the Company.

Accordingly, we cannot assure you that we will be able to identify strategic opportunities or successfully execute and complete transactions on commercially reasonable terms or at all. Similarly, we cannot assure you that we will actually realize any anticipated benefits from such transactions, including that the consummation of any such strategic alternatives will result in our ability to provide liquidity options to our stockholders. Additionally, even if the Company is successful in executing and completing a transaction with respect to one or more of its asset segments, the Company may determine that it is in the best interests of the Company and its stockholders to reinvest any net proceeds resulting from such strategic transaction(s) in one or more of the Company’s core strategic segments. Furthermore, the pursuit of such strategic alternatives could demand significant time and attention from management and divert management’s attention from focusing on our core strategic holdings and business plan, which could harm our business.
We are subject to many risks in the process of becoming a self-managed company, and the transition may not prove successful.

On March 12, 2014, we entered into a series of agreements, and amendments to existing agreements, with our business manager and property managers, under which we have begun the process of becoming fully self-managed, which we refer to as the self-management transactions. As a result of the self-management transactions and related agreements, we terminated our business management agreement, hired all of the business manager’s employees and acquired the assets necessary to conduct the functions previously performed by our business manager. In addition, we hired certain employees of our property managers; assumed certain property manager functions, including property-level accounting, lease administration, leasing, marketing and construction functions; and amended our property management agreements to reduce our property management fees as a result of our assumption of such responsibilities. We also have now agreed to directly retain certain affiliates of the business manager to provide us with information technology services, investor services and other back-office services that were provided to us through our business manager and managed by our business manager prior to the termination of the business management agreement. On December 31, 2014, subject to the satisfaction of certain closing conditions, we have agreed to hire our property managers’ remaining employees and acquire the assets necessary to conduct the functions previously performed by our property manager. As a result of such closing conditions, there can be no assurance that the remaining self-management transactions with our property managers will be completed. If they are not completed, we could be forced to extend the property management agreements, retain new property managers or build our own property management functions, which could result in significant disruption to our business and result in substantial additional costs.
In transitioning to self-management, we could have difficulty integrating business management and property management services into a stand-alone entity and will bear risks to which we have not historically been exposed. An inability to manage the transition to self-management effectively could, therefore, result in our incurring additional costs or experiencing other

7



problems. There may also be unforeseen costs, expenses and difficulties associated with self-providing the services previously provided by our business manager and property managers. Such difficulties could cause us to incur additional costs, and our management's attention could be diverted from most effectively managing our business and properties.

Effective February 1, 2014, we no longer pay fees to our business manager and beginning January 1, 2015, we expect not to pay fees to our property managers. However, our direct expenses will increase. We will be responsible for paying the salaries and benefits (including employee benefit plan costs) of all of our employees as well as costs associated with legal, accounting, general office and other services. We will also be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes and other employee related grievances. We may also issue equity awards to officers and employees which would decrease our net income and funds from operations and may further dilute your investment. Furthermore, there may be unforeseen costs, expenses and difficulties associated with providing services previously provided by our business manager and property managers. As a consequence, we cannot be certain that the transition to self-management will improve our financial performance.

Under the agreements related to the self-management transactions, the business manager has retained, and the property managers will retain, liability for, and will indemnify and hold us harmless against liabilities of, their pre-closing operations. In addition, the business manager and property managers are obligated to indemnify us for breaches of representations and warranties and violations of covenants contained in such agreements. If the business manager or property managers do not satisfy such obligations, or do not comply with their indemnity obligations, we could incur significant additional costs. The business manager’s and property managers’ obligations, including their indemnity obligations, are guaranteed by an indirect wholly owned subsidiary of The Inland Group, Inc. Such guarantee includes certain guarantor covenants, including maintaining minimum net assets of $15,000,000. The guarantor’s primary assets are marketable securities, the value of which is subject to market fluctuations. There can be no assurance that the guarantor will comply with its financial covenants or that sufficient assets will be available to pay amounts owed to us under the guarantee. Consequently, we could incur substantial costs if the guarantor fails to meet its obligations under the guarantee. In addition, we will continue to rely on our property managers and affiliates of our business manager to provide us with services that are important to our business. If the property managers or the business manager affiliates are unwilling or unable to provide such services as required under the applicable agreements, then disruptions to our business may occur, and we may incur substantial additional costs.

If we lose or are unable to obtain key personnel, our ability to implement our business strategies could be delayed or hindered.
Our ability to achieve our objectives depends, to a significant degree, upon the continued contributions of our executive officers and our other key personnel. We do not have employment agreements with these persons and do not separately maintain “key person” life insurance that would provide us with proceeds in the event of death or disability of these persons. We believe that our future success depends, in large part, on our ability to retain and hire highly-skilled managerial and operating personnel. Competition for persons with managerial and operational skills is intense, and we cannot assure you that we will be successful in retaining or attracting skilled personnel. If we lose or are unable to obtain the services of our executive officers and other key personnel, or do not establish or maintain the necessary strategic relationships, our ability to implement our business strategy could be delayed or hindered.
We are the subject of an ongoing investigation by the SEC and have received related derivative demands by stockholders to conduct investigations. The SEC's investigation, the derivative demands, or both could have a material adverse impact on our business.
We have learned that the SEC is conducting a non-public, formal, fact-finding investigation (the “SEC Investigation”) to determine whether there have been violations of certain provisions of the federal securities laws related to the business management fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the Company might become a self-administered REIT.
We have also received related demands (“Derivative Demands”) by stockholders to conduct investigations regarding claims that our officers, our board of directors, our former business manager, and the affiliates of our former business manager (the “Inland American Parties”) breached their fiduciary duties to us in connection with the matters that we disclosed are subject to the SEC Investigation. The first Derivative Demand claims that the Inland American Parties (i) falsely reported the value of our common stock until September 2010; (ii) caused us to purchase shares of our common stock from stockholders at prices in excess of their value; and (iii) disguised returns of capital paid to stockholders as REIT income resulting in the payment of fees to our former business manager for which it was not entitled. The three stockholders in that demand contend that legal proceedings should seek recovery of damages in an unspecified amount allegedly sustained by us. The second Derivative Demand by another shareholder makes similar claims and further alleges that the Inland American Parties (i) caused us to

8



engage in transactions that unduly favored related parties, (ii) falsely disclosed the timing and amount of distributions, and (iii) falsely disclosed whether we might become a self-administered REIT. A special litigation committee has been formed by our board of directors to investigate the matters related to the Investigation and the Derivative Demands. We also received a letter from another stockholder that fully adopts and joins in the first Derivative Demand, but makes no additional demands on us to perform investigation or pursue claims.
Upon receiving the first of the Derivative Demands, the full board of directors responded by authorizing the independent directors to investigate the claims contained in the first Derivative Demand, any subsequent stockholder demands, as well as any other matters the independent directors see fit to investigate, including matters related to the SEC Investigation. Pursuant to this authority, the independent directors have formed a special litigation committee that is comprised solely of independent directors to review and evaluate the matters referred by the full Board to the independent directors, and to recommend to the full Board any further action as is appropriate. The special litigation committee is investigating these claims with the assistance of independent legal counsel and will make a recommendation to the Board of Directors after the committee has completed its investigation.
On March 21, 2013, counsel for the stockholders who made the first Derivative Demand filed a derivative lawsuit in the Circuit Court of Cook County, Illinois, on behalf of the Company. The case has been stayed pending completion of the special litigation committee's investigation.
We cannot reasonably estimate the timing or outcome of either the SEC Investigation or the investigation by the special litigation committee or Derivative Demands, nor can we predict whether or not any of these matters may have a material adverse effect on our business. These matters may cause us to incur significant legal expense, both directly and as the result of any indemnification obligations. In addition, the SEC Investigation, the Derivative Demands or the special litigation committee investigation may divert management's attention from our ordinary business operations or may also limit our ability to obtain financing to fund our on-going operating requirements, which could harm our business. Adverse findings by the SEC or the special litigation committee, future litigation related thereto, or the incurrence of costs, fees, fines or penalties that are not reimbursed under our insurance policies, could have a material adverse impact on our business.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.
We have deposited our cash and cash equivalents in several banking institutions in an attempt to minimize exposure to the failure or takeover of any one of these entities. However, the Federal Insurance Deposit Corporation, or “FDIC,” generally only insures limited amounts per depositor per insured bank. At December 31, 2013 we had cash and cash equivalents and restricted cash deposited in interest bearing transaction accounts at certain financial institutions exceeding these federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over the federally insured levels. The loss of our deposits could reduce the amount of cash we have available to distribute or invest.
A failure of our information technology (IT) infrastructure could adversely impact our business and operations.
We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to changing needs of our business. We face the challenge of supporting older systems and hardware and implementing necessary upgrades to our IT infrastructure. We may not be able to successfully implement these upgrades in an effective manner. In addition, we may incur significant increases in costs and extensive delays in the implementation and rollout of any upgrades or new systems. If there are technological impediments, unforeseen complications, errors or breakdowns in implementation, the disruptions could have an adverse effect on our business and financial condition.
Risks Related to our Real Estate Assets
There are inherent risks with real estate investments.
Investments in real estate assets are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly converted to cash, limiting our ability to promptly vary our portfolio in response to changing economic, financial and investment conditions. Investments in real estate assets also are subject to adverse changes in general economic conditions which, for example, reduce the demand for rental space or impact a tenant’s ability to pay rent.

9



Among the factors that could impact our real estate assets and the value of an investment in us are:
local conditions such as an oversupply of space or reduced demand for real estate assets of the type that we own or seek to acquire, including, with respect to our lodging properties, quick changes in supply of and demand for rooms that are rented or leased on a day-to-day basis;
inability to collect rent from tenants;
vacancies or inability to rent space on favorable terms;
inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;
increases in energy costs or airline fares or terrorist incidents which impact the propensity of people to travel and therefore impact revenues from our lodging facilities because operating costs cannot be adjusted as quickly;
adverse changes in the federal, state or local laws and regulations applicable to us, including those affecting rents, zoning, prices of goods, fuel and energy consumption, water and environmental restrictions;
the relative illiquidity of real estate investments;
changing market demographics;
an inability to acquire and finance, or refinance, properties on favorable terms, if at all;
acts of God, such as earthquakes, floods or other uninsured losses; and
changes or increases in interest rates and availability of financing.
In addition, periods of economic slowdown or recession, or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or increased defaults under existing leases. We have experienced these impacts in the last few years. There is no assurance that conditions will improve or that these impacts will not occur in the future.
We depend on tenants for our revenue, and accordingly, lease terminations, tenant default, and bankruptcies could adversely affect the income produced by our properties.
The success of our investments depends on the financial stability of our tenants. Certain economic conditions may adversely affect one or more of our tenants. For example, business failures and downsizings can affect the tenants of our office and industrial properties and may also contribute to reduced consumer demand for retail products and services which would impact tenants of our retail properties. In addition, our retail shopping center properties typically are anchored by large, nationally recognized tenants, any of which may experience a downturn in their business that may weaken significantly their financial condition and thus the performance of the applicable shopping center. Further, mergers or consolidations among large retail establishments could result in the closure of existing stores or duplicate or geographically overlapping store locations, which could include tenants at our retail properties.
As a result of these factors, our tenants may delay lease commencements, decline to extend or renew their leases upon expiration, fail to make rental payments, or declare bankruptcy. Any of these actions could result in the termination of the tenants' leases, the expiration of existing leases without renewal, or the loss of rental income attributable to the terminated or expired leases. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment and re-leasing our property. Specifically, a bankruptcy filing by, or relating to, one of our tenants or a lease guarantor would bar efforts by us to collect pre-bankruptcy debts from that tenant or lease guarantor, or its property, unless we receive an order permitting us to do so from the bankruptcy court. In addition, we cannot evict a tenant solely because of bankruptcy. The bankruptcy of a tenant or lease guarantor could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full. If, however, a lease is rejected by a tenant in bankruptcy, we would have only a general, unsecured claim for damages. An unsecured claim would only be paid to the extent that funds are available and only in the same percentage as is paid to all other holders of general, unsecured claims. Restrictions under the bankruptcy laws further limit the amount of any other claims that we can make if a lease is rejected. As a result, it is likely that we would recover substantially less than the full value of the remaining rent during the term.
Geographic concentration also exposes us to risks of oversupply and competition in these markets. Significant increases in the supply of certain property types, including hotels, without corresponding increases in demand could have a material adverse effect on our financial condition, results of operations and our ability to pay distributions.
As of December 31, 2013, approximately, 6%, 8%, and 10% of our base rental income of our consolidated portfolio, excluding our lodging properties, was generated by properties located in the Dallas, Chicago and Houston metropolitan areas, respectively. Additionally, at December 31, 2013, 45 of our lodging properties, or approximately 45% of our lodging portfolio,

10



were located on the eastern seaboard states ranging from Connecticut to Florida, including 7 hotels in New Jersey. Approximately 27% of our lodging portfolio is located in the southern states, including 19 properties located in Texas.
One of our tenants generated a significant portion of our revenue, and rental payment defaults by this significant tenant could adversely affect our results of operations.
For the year ended December 31, 2013, approximately 9% of our rental revenue from continuing operations was generated by two properties leased to AT&T, Inc. The leases, with approximately 1.7 million and 0.3 million square feet, expire in 2016 and 2019, respectively. An additional property leased to AT&T is classified as held for sale, and the lease, with approximately 1.5 million square feet, expires in 2017. As a result of the concentration of revenue generated from these properties, if AT&T were to cease paying rent or fulfilling its other monetary obligations, we could have significantly reduced rental revenues or higher expenses until the defaults were cured or the properties were leased to a new tenant or tenants.
Leases representing approximately 7.0% and 12.9% of the rentable square feet of our retail and non-core portfolio, respectively, are scheduled to expire in 2014. We may be unable to renew leases or lease vacant space at favorable rates or at all.
As of December 31, 2013, leases representing approximately 7.0% of the 17,031,497 rentable square feet of our retail portfolio and 12.9% of the 7,257,246 rentable square feet of our non-core properties (excluding a conventional multi-family property) are scheduled to expire in 2014. We may be unable to extend or renew any of these leases, or we may be able to lease these spaces only at rental rates equal to or below existing rental rates. In addition, some of our tenants have leases that include early termination provisions that permit the lessee to terminate all or a portion of its lease with us after a specified date or upon the occurrence of certain events with little or no liability to us. We may be required to offer substantial rent abatements, tenant improvements, early termination rights or below-market renewal options to retain these tenants or attract new ones. Portions of our properties may remain vacant for extended periods of time. Further, some of our leases currently provide tenants with options to renew the terms of their leases at rates that are less than the current market rate or to terminate their leases prior to the expiration date thereof. If we are unable to obtain new rental rates that are on average comparable to our asking rents across our portfolio, then our ability to generate cash flow growth will be negatively impacted.
We may be required to make significant capital expenditures to improve our properties in order to retain and attract tenants.
We expect that, upon the expiration of leases at our properties, we may be required to provide rent or other concessions to tenants, accommodate requests for renovations, build-to-suit remodeling and other improvements or provide additional services to our tenants. As a result, we may have to pay for significant leasing costs or tenant improvements in order to retain tenants whose leases are expiring and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to fund these expenditures. If we are unable to do so, or if capital is otherwise unavailable, we may be unable to fund the required expenditures. This could result in non-renewals by tenants upon expiration of their leases or the ability to attract new tenants, which would result in declines in revenues from operations.
We face significant competition in the leasing market, which may decrease or prevent increases in the occupancy and rental rates of our properties.
We own properties located throughout the United States. We compete with numerous developers, owners and operators of commercial properties, many of which own properties similar to, and in the same market areas as, our properties. If our competitors offer space at rental rates below current market rates, or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be pressured to reduce our rental rates below those we currently charge in order to attract new tenants or retain existing tenants when their leases expire. Also, if our competitors develop additional properties in locations near our properties, there may be increased competition for creditworthy tenants, which may require us to make capital improvements to properties that we would not have otherwise made.
Acts of God, such as earthquakes, floods or other uninsured losses may make us susceptible to adverse climate developments from the effects of these natural disasters in those areas.
Because our properties are concentrated in certain geographic areas, our operating results are likely to be impacted by climate changes affecting the real estate markets in those areas. Adverse events such as hurricanes, floods, wildfires, earthquakes, blizzards or other natural disasters, could cause a loss of revenues at our real estate properties. These losses may not be insured or insurable at an acceptable cost. Elements such as water, wind, hail, or fire damage can increase or accelerate wear on our properties' weatherproofing, and mechanical, electrical and other systems, and cause mold issues. As a result, we may incur additional operating costs and expenditures for capital improvements and maintenance at these properties.

11



Actions of our joint venture partners could negatively impact our performance.
As of December 31, 2013 we had entered into joint venture agreements with ten entities to fund investment is in office, industrial/distribution, retail, lodging, and mixed use properties. The carrying value of our investment in these joint ventures, which we do not consolidate for financial reporting purposes, was $263.9 million. For the year ended December 31, 2013, we recorded income of $12.0 million and impairments, gains and losses, net of $3.5 million associated with these ventures.
With respect to these investments, we are not in a position to exercise sole decision-making authority regarding the property, or the joint venture. Consequently, our joint venture investments may involve risks not otherwise present with other methods of investing in real estate. For example, our venture partner may have economic or business interests or goals which are or which become inconsistent with our business interests or goals or may take action contrary to our instructions or requests or contrary to our policies or objectives. We have experienced these events from time to time with our current or former venture partners, which in some cases has resulted in litigation. An adverse outcome in any lawsuit could have a material effect on our business, financial condition or results of operations. In addition, any litigation increases our expenses and prevents our officers and directors from focusing their time and effort on our core strategic holdings and business plans. Our relationships with our venture partners are contractual in nature. These agreements may restrict our ability to sell our interest when we desire or on advantageous terms and, on the other hand, may be terminated or dissolved under the terms of the agreements and, in each event, we may not continue to own or operate the interests or assets underlying the relationship or may need to purchase these interests or assets at an above-market price to continue ownership.
Credit market disruptions and certain economic trends may increase the likelihood of a commercial developer defaulting on its obligations with respect to our development projects, including projects where we have notes receivable, or becoming bankrupt or insolvent.
We have invested in, and may continue to invest in, projects that are in various stages of pre-development and development. Investing in properties in pre-development or under development, and in lodging properties in particular, which typically must be renovated or otherwise improved on a regular basis, including renovations and improvements required by existing franchise agreements, subjects us to uncertainties such as the ability to achieve desired zoning for development, environmental concerns of governmental entities or community groups, ability to control construction costs or to build in conformity with plans, specifications and timetables. In many cases, developers may not have adequate capital to address downturns in the market. Further, the developers of the projects in which we have invested are exposed to risks not only with respect to our projects, but also other projects in which they are involved. A default by a developer in respect to one of our development project investments, or the bankruptcy, insolvency or other failure of a developer for one of these projects, may require that we determine whether we want to assume the senior loan, fund monies beyond what we are contractually obligated to fund, take over development of the project, find another developer for the project, or sell our interest in the project. Developer failures could give tenants the right to terminate pre-construction leases, delay efforts to complete or sell the development project and could ultimately preclude us from realizing our anticipated returns. These events could cause a decrease in the value of our development assets and compel us to seek additional sources of funding, which may or may not be available, in order to hold and complete the development project.
Generally, under bankruptcy law and the bankruptcy guarantees we have required of certain of our joint venture development partners, we may seek recourse from the developer-guarantor to complete our development project with a substitute developer partner. However, in the event of a bankruptcy by the developer-guarantor, we cannot provide assurance that the developer or its trustee will satisfy its obligations. The bankruptcy of any developer or the failure of the developer to satisfy its obligations would likely cause us to have to complete the development or find a replacement developer, which could result in delays and increased costs. We cannot provide assurance that we would be able to complete the development on terms as favorable as when we first entered into the project. If we are not able to, or elect not to, the development costs ordinarily would be charged against income for the then-current period if we determine our costs are not recoverable.
Our investments in equity and debt securities have materially impacted, and may in the future materially impact, our results.
As of December 31, 2013, we owned investment in real estate related equity and debt securities with an aggregate market value of $242.8 million. For the year ended December 31, 2013, we realized gains on sale of securities of $31.5 million net of impairments of $1.1 million, and net unrealized gains of $17.6 million. Real estate related equity securities are always unsecured and subordinated to other obligations of the issuer. Investments in real estate-related equity securities are subject to numerous risks including: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) substantial market price volatility resulting from, among other things, changes in prevailing interest rates in the overall market or related to a specific issuer, as well as changing investor perceptions of the market as a whole, REIT or real estate securities in particular or the specific issuer in question; (3) subordination to the liabilities of the issuer; (4) the possibility that

12



earnings of the issuer may be insufficient to meet its debt service obligations or to pay distributions; and (5) with respect to investments in real estate-related preferred equity securities, the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to redeem the securities. In addition, investments in real estate-related securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer and to the risks inherent with real estate-related investments discussed herein. In fact, many of the entities that we have invested in have reduced the dividends paid on their securities. The stock prices for some of these entities have declined since our initial purchase, and in certain cases we have sold these investments at a loss.
Any mortgage loans that we originate or purchase are subject to the risks of delinquency and foreclosure.
We may originate and purchase mortgage loans. Mortgage loans are subject to risks of delinquency and foreclosure, and risks of loss. The ability of a borrower to repay a loan secured by an income-producing property depends primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. A property's net operating income can be affected by the any of the potential issues associated with real estate-related investments as discussed herein. We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. We may also be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.
An increase in real estate taxes may decrease our income from properties.
From time to time, the amount we pay for property taxes increases as either property values increase or assessment rates are adjusted. Increases in a property's value or in the assessment rate result in an increase in the real estate taxes due on that property. If we are unable to pass the increase in taxes through to our tenants, our net operating income for the property will decrease.
Uninsured losses or premiums for insurance coverage may adversely affect a stockholder's returns.
We attempt to adequately insure all of our properties against casualty losses. There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders sometimes require commercial property owners to purchase specific coverage against terrorism as a condition for providing mortgage loans. These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. If we incur any casualty losses not fully covered by insurance, the value of our assets will be reduced by the amount of the uninsured loss. In addition, other than any reserves we may establish, we have no designated source of funding to repair or reconstruct any uninsured damaged property.
Terrorist attacks and other acts of violence or war may affect the markets in which we operate our operations and our profitability.
We own estate assets located in areas that are susceptible to attack. These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs. More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in or damage to, the United States and worldwide financial markets and economy. Any terrorist incident may, for example, deter people from traveling.

13



The cost of complying with environmental and other governmental laws and regulations may adversely affect us.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations (including those of foreign jurisdictions) relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. We also are required to comply with various local, state and federal fire, health, life-safety and similar regulations. Some of these laws and regulations may impose joint and several liabilities on tenants or owners for the costs of investigating or remediating contaminated properties. These laws and regulations often impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of removing or remediating could be substantial. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent a property or to use the property as collateral for borrowing.
Environmental laws and regulations also may impose restrictions on the manner in which properties may be used or businesses may be operated, and these restrictions may require substantial expenditures by us. Environmental laws and regulations provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Third parties may seek recovery from owners of real properties for personal injury or property damage associated with exposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricter interpretations of existing laws may require material expenditures by us. For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency, and waste management. We are not aware of any such existing requirements that we believe will have a material impact on our current operations. However, future requirements could increase the costs of maintaining or improving our existing properties or developing new properties.
Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.
The presence of mold at any of our properties could require us to undertake a costly program to remediate, contain or remove the mold. Mold growth may occur when moisture accumulates in buildings or on building materials. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing because exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. The presence of mold could expose us to liability from our tenants, their employees and others if property damage or health concerns arise.
We may incur significant costs to comply with the Americans With Disabilities Act.
Our properties generally are subject to the Americans With Disabilities Act of 1990, as amended. Under this act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The act's requirements could require us to remove access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.


Additional Risks Associated with our Retail Assets
Our retail properties face considerable competition for the tenancy of our lessees and the business of retail shoppers.
There are numerous shopping venues that compete with our retail properties in attracting retailers to lease space and shoppers to patronize their properties. In addition, our retail tenants face changing consumer preferences and increasing competition from other forms of retailing, such as catalogues and other forms of direct marketing, internet websites and telemarketing as well as other retail centers located within the geographic market area of our retail properties that compete with our properties for customers. All of these factors may adversely affect our tenants’ cash flows and, therefore, their ability to pay rent.

14



Retail conditions may adversely affect our income and our ability to make distributions to you.
A retail property’s revenues and value may be adversely affected by a number of factors, many of which apply to real estate investment generally, but which also include trends in the retail industry and perceptions by retailers or shoppers of the safety, convenience and attractiveness of the retail property. Our properties are located in public places, and any incidents of crime or violence, including acts of terrorism, could result in a reduction of business traffic to tenant stores in our properties. Any such incidents may also expose us to civil liability or harm our reputation. In addition, to the extent that the investing public has a negative perception of the retail sector, the value of our retail properties may be negatively impacted.
The recent economic downturn and weak recovery in the United States has had, and may continue to have, an adverse impact on the retail industry generally. Slow or negative growth in the retail industry could result in defaults by retail tenants, which could have an adverse impact on our business, financial condition, or result of operations.
The economic downturn and weak recovery in the United States has had an adverse impact on the retail industry generally. As a result, the retail industry is facing reductions in sales revenues and increased bankruptcies throughout the United States. The continuation of adverse economic conditions may result in an increase in distressed or bankrupt retail companies, which in turn would result in an increase in defaults by tenants at our commercial properties. Additionally, slow economic growth is likely to hinder new entrants into the retail market which may make it difficult for us to fully lease our real properties. Tenant defaults and decreased demand for retail space would have an adverse impact on the value of our retail properties and our results of operations.
Competition may impede our ability to renew leases or re-let space as leases expire and require us to undertake unbudgeted capital improvements, which could harm our operating results.
Our properties are located in developed areas. Any competitive properties that are developed close to our existing properties also may impact our ability to lease space to creditworthy tenants. Increased competition for tenants may require us to make capital improvements to properties that we would not have otherwise planned to make. Any unbudgeted capital improvements may negatively impact our financial position. Also, to the extent we are unable to renew leases or re-let space as leases expire, it would result in decreased cash flow from tenants and reduce the income produced by our properties. Excessive vacancies (and related reduced shopper traffic) at one of our properties may hurt sales of other tenants at that property and may discourage them from renewing leases.
We may be restricted from re-leasing space at our retail properties.
Leases with retail tenants may contain provisions giving the particular tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center. These provisions may limit the number and types of prospective tenants interested in leasing space in a particular retail property.
We have entered into long-term leases with some of our retail tenants, those leases may not result in fair value over time, which could adversely affect our revenues and ability to make distributions.
We have entered into long-term leases with some of our retail tenants. Long-term leases do not allow for significant changes in rental payments and do not expire in the near term. If we do not accurately judge the potential for increases in market rental rates when negotiating these long-term leases, significant increases in future property operating costs could result in receiving less than fair value from these leases. These circumstances would adversely affect our revenues and funds available for distribution.
Our revenue will be impacted by the success and economic viability of our anchor retail tenants. Our reliance on single or significant tenants in certain buildings may decrease our ability to lease vacated space and adversely affect the returns on your investment.
In the retail sector, a tenant occupying all or a large portion of the gross leasable area of a retail center, commonly referred to as an anchor tenant, may become insolvent, may suffer a downturn in business, or may decide not to renew its lease. Any of these events would result in a reduction or cessation in rental payments to us and would adversely affect our financial condition. A lease termination by an anchor tenant could result in lease terminations or reductions in rent by other tenants whose leases may permit cancellation or rent reduction if another tenant’s lease is terminated. Similarly, the leases of some anchor tenants may permit the anchor tenant to transfer its lease to another retailer. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease and thereby reduce the income generated by that retail center. A lease transfer to a new anchor tenant could also allow other tenants to make reduced rental payments or to terminate their leases in accordance with lease

15



terms. In the event that we are unable to release the vacated space to a new anchor tenant, we may incur additional expenses in order to remodel the space to be able to re-lease the space to more than one tenant.
Additional Risks Associated with our Lodging Assets

We are subject to the business, financial and operating risks inherent to the lodging industry, any of which could reduce our revenues and limit opportunities for growth.
Our business is subject to a number of business, financial and operating risks inherent to the lodging industry, including:
significant competition from multiple lodging providers in all areas where we operate;
changes in operating costs, including energy, food, compensation, benefits and insurance;
increases in costs due to inflation that may not be fully offset by price and fee increases in our business;
changes in tax and governmental regulations that influence or set wages, prices, interest rates or construction and maintenance procedures and costs;
the costs and administrative burdens associated with complying with applicable laws and regulations;
significant increases in cost for health care coverage for employees and potential government regulation with respect to health care coverage;
shortages of labor or labor disruptions;
the availability and cost of capital necessary for us and third-party hotel owners to fund investments, capital expenditures and service debt obligations;
the quality of services provided by franchisees;
the financial condition of third-party property owners, developers and joint venture partners;
relationships with third-party property owners, developers and joint venture partners, including the risk that owners may terminate our management, franchise or joint venture agreements;
changes in desirability of geographic regions of the hotels in our business and geographic concentration of our operations and customers;
changes in the supply and demand for hotel services (including rooms, food and beverage, and other products and services);
the ability of third-party internet and other travel intermediaries to attract and retain customers; and
decreases that may result in the frequency of business travel as a result of alternatives to in person meetings, including virtual meetings hosted on-line or over private teleconferencing networks.

Any of these factors could increase our costs or limit or reduce the prices we are able to charge for lodging services, or otherwise affect our ability to maintain existing properties or develop new properties. As a result, any of these factors can reduce our revenues and limit opportunities for growth.
Macro economic and other factors beyond our control can adversely affect and reduce demand for our products and services.
Macro economic and other factors beyond our control can reduce demand for lodging products and services, including demand for rooms at properties that we own. These factors include, but are not limited to:
changes in general economic conditions, including low consumer confidence, unemployment levels, depressed real estate prices resulting from the severity and duration of any downturn in the U.S. or global economy;
war, political conditions or civil unrest, terrorist activities or threats and heightened travel security measures instituted in response to these events;
decreased corporate or government travel-related budgets and spending, as well as cancellations, deferrals or renegotiations of group business such as industry conventions;
statements, actions, or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities;
the financial and general business condition of the airline, automotive and other transportation-related industries and its impact on travel, including decreased airline capacity and routes;
conditions which negatively shape public perception of travel, including travel-related accidents and outbreaks of pandemic or contagious diseases, such as avian flu, severe acute respiratory syndrome (SARS) and H1N1 (swine flu);
climate change or availability of natural resources;
natural or man-made disasters, such as earthquakes, tsunamis, tornadoes, hurricanes, typhoons, floods, volcanic eruptions, oil spills and nuclear incidents;
changes in the desirability of particular locations or travel patterns of customers;
cyclical over-building in the hotel industry; and

16



organized labor activities, which could cause a diversion of business from hotels involved in labor negotiations and loss of business for our hotels generally as a result of certain labor tactics.

Any one or more of these factors could limit or reduce overall demand for our products and services or could negatively impact our revenue sources, which could adversely affect our business, financial condition and results of operations.
We focus on investing in upper-upscale and upscale lodging segments. These segments can be very volatile.
A significant portion of our assets consist of hotels, a very different asset class from retail and student housing properties. Retail tenants tend to enter into longer term leases which provide us with some stability over the term of the lease. Lodging, however, is very volatile. Most hotel guests stay at a hotel for only a few nights, so the rate and occupancy at each of our hotels changes every day. In addition, we are focusing on investing in the upper-upscale and upscale segments of the lodging sector. These segments tend to be more susceptible to changes in the economy because they generally target business and high end leisure travelers. In particular, revenue from group contract business, such as meeting space and conferences, may be large component of total revenues for an upper-upscale hotel. Due to economy changes, there may be a reduction in group business demand. As a result, revenues and earnings from our hotel sector may be very volatile.
In the past, events beyond our control, including economic slowdowns and terrorism, harmed the operating performance of the lodging industry generally. If these or similar events occur again, our operating and financial results may be harmed by declines in average daily room rates and occupancy.
The performance of the lodging industry has traditionally been closely linked with the performance of the general economy. The majority of our hotels are classified as upper upscale hotels. In an economic downturn, this type of hotel may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates because, as noted above, upper upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may reduce travel costs by limiting travel or by using lower cost accommodations. Also, volatility in transportation fuel costs, increases in air and ground travel costs and decreases in airline capacity may reduce the demand for our hotel rooms. Accordingly, our financial results may be harmed if economic conditions worsen, or if travel-associated costs, such as transportation fuel costs, increase. In addition, the terrorist attacks of September 11, 2001 had a dramatic adverse effect on business and leisure travel, and on the occupancy and average daily rate of our hotels. Future terrorist activities could have a harmful effect on both the industry and us.
Failure of the lodging industry to exhibit sustained improvement or to improve as expected will impact our business strategy.
We continue to execute on our strategy to focus on three property types: retail, student housing and lodging. The lodging sector has become one of our larger property segments. Our focus on lodging is driven, in part, on our view that lodging will benefit from an improving economy. There is no assurance, however, that the general economy will continue to improve or that lodging industry fundamentals will continue to improve with the general economy. In the event conditions in the industry do not sustain improvement or improve as we expect, or deteriorate, our revenues and profits from our lodging properties will be negatively impacted. Further, the underlying value of our assets may grow slower than the economy as a whole or may decline in value which will have a material adverse effect on our business plan.
The lodging industry is subject to seasonal and cyclical volatility, which may contribute to fluctuations in our results of operations and financial condition.
The lodging industry is seasonal in nature. The periods during which our lodging properties experience higher revenues vary from property to property, depending principally upon location and the customer base served. Due to seasonality, we generally expect our lodging revenues to be greater during the second and third quarters with lower revenues in the first and fourth quarters. In addition, the lodging industry is cyclical and demand generally follows, on a lagged basis, the general economy. The seasonality and cyclicality of our industry may contribute to fluctuations in our results of operations and financial condition.
Our hotels are subject to significant competition.
The hotel industry is very competitive regardless of the segment. Material increases in the supply of new hotel rooms to a particular market can quickly destabilize that market and existing hotels can experience rapidly decreasing RevPAR and profitability. Over-building in one or more of our markets may adversely affect our business plan.

17



In the case of the upper upscale segment, hotels compete on the basis of location, room rates and quality, service levels, reputation and reservations systems, among many other factors. There are many competitors in this segment, some of whom may have greater marketing and financial resources than us. This competition could reduce occupancy levels and room revenue at our hotels, which would harm our operations. Over-building in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. We may also face competition from nationally recognized hotel brands with which we are not associated. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale hotels when compared to other classes of hotels.
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 in 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 our financial condition, results of operations, the market price of our common stock and our ability to make distributions to our stockholders may be adversely affected.
The operating results of some of our individual hotels are significantly impacted by group contract business (such as meeting space and conferences) and room nights generated by large corporate transient customers, and the loss of such customers for any reason could harm our operating results.
Group contract business (such as meeting space and conferences) and room nights generated by other large corporate transient customers can significantly impact the results of operations of our hotels. These contracts and customers vary from hotel to hotel and change from time to time. Such group contracts are typically for a limited period of time after which they may be put up for competitive bidding. The impact and timing of large events are not always easy to predict. As a result, the operating results for our individual hotels can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can affect the revenues and earnings generated by our lodging properties.
The outbreak of influenza or other widespread contagious disease could reduce travel and adversely affect hotel demand.
The widespread outbreak of infectious or contagious disease in the U.S. could reduce travel and adversely affect the hotel industry generally and our business in particular.
We are subject to risks associated with our ongoing need for renovations and capital improvements as well as financing these expenditures.
In order to remain competitive, our hotels have an ongoing need for renovations and other capital improvements, including replacements, from time to time, of furniture, fixtures and equipment. These capital improvements may give rise to the following risks:
construction cost overruns and delays;
a possible shortage of available monies to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms;
the renovation investment failing to produce the returns on investment that we expect;
disruptions in the operations of the hotel as well as in demand for the hotel while capital improvements are underway; and
disputes with franchisors/hotel managers regarding compliance with relevant management/franchise agreements.
In addition, we may not be able to fund capital improvements or acquisitions solely from cash provided from our operating activities because we generally must distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains, each year to maintain our REIT tax status. As a result, our ability to fund capital expenditures, or investments through retained earnings, is very limited. Consequently, we rely upon the availability of debt or equity capital to fund our investments and capital improvements. These sources of funds may not be available on reasonable terms and conditions or at all.
Our franchisors and brand managers may require us to make capital expenditures pursuant to property improvement plans, or PIPs, and the failure to make the expenditures required under the PIPs or to comply with brand standards could cause the franchisors or hotel brands to terminate the franchise or management agreements.

18



Our franchisors and brand managers may require that we make renovations to certain of our hotels in connection with revisions to our franchise or management agreements. In addition, upon regular inspection of our hotels, our franchisors and hotel brands may determine that additional renovations are required to bring the physical condition of our hotels into compliance with the specifications and standards each franchisor or hotel brand has developed. In connection with the acquisitions of hotels, franchisors and hotel brands may also require PIPs, which set forth their renovation requirements. If we do not satisfy the PIP renovation requirements, the franchisor or hotel brand may have the right to terminate the applicable agreement. In addition, if we default on a franchise agreement as a result of our failure to comply with the PIP requirements, in general, we will be required to pay the franchisor liquidated damages.
Funds spent to maintain licensed brand standards or the loss of a brand license would adversely affect our lodging segment.
Our hotels operate under licensed brands, either through management or franchise agreements with hotel brand companies that permit us to do so, and we anticipate that the hotels we acquire in the future also will operate under licensed brands. We are therefore subject to the risks inherent in concentrating our hotels in several licensed brands. These risks include reductions in business following negative publicity related to one of our licensed brands or arising from or after a dispute with a hotel brand company.
The maintenance of the brand licenses for our hotels is subject to the hotel brand companies’ operating standards and other terms and conditions. Hotel brand companies periodically inspect our hotels to ensure that we and our lessees and hotel managers follow their standards. Failure by us, our taxable REIT subsidiaries or one of our hotel managers to maintain these standards or other terms and conditions could result in a brand license being terminated. If a brand license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the hotel brand company for a termination payment, which will vary by hotel brand company and by hotel. As a condition of our continued holding of a brand license, a hotel brand company could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a brand license if we do not make hotel brand company-required capital expenditures.
If a hotel brand company terminates the brand license, we may try either to obtain a suitable replacement brand or to operate the hotel without a brand license. The loss of a brand license could materially and adversely affect the operations or the underlying value of the hotel because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the hotel brand company. A loss of a brand license for one or more hotels could materially and adversely affect the revenues and earnings generated by our lodging sector.
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, may be adversely affected.
To qualify as a REIT, we must rely on third parties to operate our hotels.
To continue qualifying as a REIT, we may not, among other things, operate any hotel, or directly participate in the decisions affecting the daily operations of any hotel. Thus, we have retained third party managers to operate our hotel properties. We do not have the authority to directly control any particular aspect of the daily operations of any hotel, such as setting room rates. Thus, even if we believe our hotels are being operated in an inefficient or sub-optimal manner, we may not be able to require an immediate change to the method of operation. Our only alternative for changing the operation of our hotels may be to replace the third party manager of one or more hotels in situations where the applicable management agreement permits us to terminate the existing manager. Certain of these agreements may not be terminated without cause, which generally requires fraud, misrepresentation and other illegal acts. Even if we terminate or replace any manager, there is no assurance that we will be able to find another manager or that we will be able to enter into new management agreements favorable to us. Any change of hotel management would disrupt operations, which could have an adverse material effect on our operating results and financial condition.
Conditions of franchise agreements could adversely affect us.
Our lodging properties are operated pursuant to agreements with nationally recognized franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PLC, Hyatt Corporation, Fairmont Hotels and

19



Resorts, and Starwood Hotels and Resorts Worldwide, Inc. These agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a franchised hotel in order to maintain uniformity within the particular franchisor's system. These standards are subject to change, in some cases at the discretion of the franchisor, and may restrict our ability to make improvements or modifications to a hotel without the consent of the franchisor. Conversely, these standards may require us to make certain improvements or modifications to a hotel, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment.
These agreements also permit the franchisor to terminate the agreement in certain cases such as a failure to pay royalties and fees or to perform covenants contained in the franchise agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the franchise without the consent of the franchisor or failure to comply with applicable law or maintain applicable standards in the operation and condition of the relevant hotel. If a franchise license terminates due to our failure to comply with the terms and conditions of the agreement, we may be liable to the franchisor for a termination payment. These payments vary. Also, these franchise agreements do not renew automatically. If we were to lose a franchise agreement, there is no assurance that we would be able to enter into an agreement with a different franchisor.
Due to restrictions in our hotel management agreements, franchise agreements, mortgage agreements and ground leases, we may not be able to sell our hotels at the highest possible price (or at all).
Our current hotel management agreements are long-term and contain certain restrictions on selling our hotels, which may affect the value of our hotels.
The hotel management agreements that we have entered into, and those we expect to enter into in the future, contain provisions restricting our ability to dispose of our hotels which, in turn, may have an adverse affect on the value of our hotels. Our hotel management agreements generally prohibit the sale of a hotel to:
certain competitors of the manager;
purchasers who are insufficiently capitalized; or
purchasers who might jeopardize certain liquor or gaming licenses.
In addition, our current hotel management agreements contain initial terms ranging from six to forty years and certain agreements have renewal periods of three to ten years which are exercisable at the option of the owner. Because our hotels would have to be sold subject to the applicable hotel management agreement, the term length of a hotel management agreement may deter some potential purchasers and could adversely impact the price realized from any such sale. To the extent we receive lower sale proceeds, we could experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to stockholders.
We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor, which could increase our operating costs, reduce the flexibility of our hotel managers to adjust the size of the workforce at our hotels and impair our ability to make distributions to our shareholders.
We have entered into management agreements with third-party hotel managers to operate our hotels. Our hotel 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 are subject to many of the costs and risks generally associated with the hotel labor force, particularly 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 or other events. Additionally, hotels where our managers have collective bargaining agreements with 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. We do not have the ability to control the outcome of these negotiations.

20



Risks Associated with Debt Financing
Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans.
We have acquired, and will continue to acquire, real estate assets by assuming existing financing or borrowing new monies. Our articles permit us to borrow up to 300% of our net assets. In addition, we may obtain loans secured by some or all of our properties or other assets to fund additional acquisitions or operations including to satisfy the requirement that we distribute at least 90% of our annual “REIT taxable income” (subject to certain adjustments) to our stockholders, or as is otherwise necessary or advisable to assure that we qualify as a REIT for federal income tax purposes. Payments required on any amounts we borrow reduce the funds available for, among other things, distributions to our stockholders because cash otherwise available for distribution is required to pay principal and interest associated with amounts we borrow.
Defaults on loans secured by a property we own may result in us losing the property or properties securing the loan that is in default as a result of foreclosure actions initiated by a lender. For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the property. If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable gain on the foreclosure but would not receive any cash proceeds. We also may fully or partially guarantee any monies that subsidiaries borrow to purchase or operate real estate assets. In these cases, we will be responsible to the lender for repaying the loans if the subsidiary is unable to do so. If any mortgage contains cross-collateralization or cross-default provisions, more than one property may be affected by a default.
Lenders may restrict certain aspects of our operations, which could, among other things, limit our ability to make distributions.
The terms and conditions contained in any of our loan documents may require us to maintain cash reserves; limit the aggregate amount we may borrow on a secured and unsecured basis; require us to satisfy restrictive financial covenants; prevent us from entering into certain business transactions, such as a merger, sale of assets or other business combination; restrict our leasing operations; or require us to obtain consent from the lender to complete transactions or make investments that are ordinarily approved only by our board of directors. In particular, we have secured mortgages on certain upper-upscale lodging properties. We believe these properties to be more susceptible to changes in the economy because they target business and high end leisure travelers. This may inhibit us from satisfying our debt covenants and put us in default with the terms of our loan documents.
In addition, secured lenders typically restrict our ability to discontinue insurance coverage on a mortgaged property even though we may believe that the insurance premiums paid to insure against certain losses, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, are greater than the potential risk of loss.
Our mortgage agreements contain certain provisions that may limit our ability to sell our properties.
In order to assign or transfer our rights and obligations under certain of our mortgage agreements, we generally must obtain the consent of the lender, pay a fee equal to a fixed percentage of the outstanding loan balance, and pay any costs incurred by the lender in connection with any such assignment or transfer.
These provisions of our mortgage agreements may limit our ability to sell our properties which, in turn, could adversely impact the price realized from any such sale. To the extent we receive lower sale proceeds, we could experience a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to stockholders.
Interest-only indebtedness may increase our risk of default.
We have obtained, and continue to borrow interest-only mortgage indebtedness. During the interest only period, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan is not reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we are required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan if we are unable to fund the lump-sum or balloon amount.

21



Increases in interest rates could increase the amount of our debt payments.
As of December 31, 2013, approximately $1.0 billion of our mortgage payables and $200.2 million of our line of credit debt bore interest at variable rates. Increases in interest rates on variable rate debt that has not otherwise been hedged through the use of swap agreements reduce the funds available for other needs, including distribution to our stockholders. As of December 31, 2013, approximately $3.7 billion of our total indebtedness bore interest at fixed rates. As fixed rate debt matures, we may not be able to borrow at rates equal to or lower than the rates on the expiring debt. In addition, if rising interest rates cause us to need additional capital to repay indebtedness, we may be forced to sell one or more of our properties or investments in real estate at times which may not permit us to realize the return on the investments we would have otherwise realized.
To hedge against interest rate fluctuations, we use derivative financial instruments, which may be costly and ineffective.
From time to time, we use derivative financial instruments to hedge exposures to changes in interest rates on certain loans secured by our assets. Our derivative instruments currently consist of interest rate swap contracts but may, in the future, include, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge. There is no assurance that our hedging strategy will achieve our objectives. We may be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.
To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we are exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. A counterparty could fail, shut down, file for bankruptcy or be unable to pay out contracts. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract to cover our risk. We cannot provide assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.
Further, the REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. We may be unable to manage these risks effectively.
We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition.
We typically finance a portion of the purchase price for each property that we acquire. However, to ensure that our offers are as competitive as possible, we generally do not enter into contracts to purchase property that include financing contingencies. Thus, we may be contractually obligated to purchase a property even if we are unable to secure financing for the acquisition. In this event, we may choose to close on the property by using cash on hand, which would result in less cash available for other purposes including funding operating costs or paying distributions to our stockholders. Alternatively, we may choose not to close on the acquisition of the property and default on the purchase contract. If we default on any purchase contract, we could lose our earnest money and become subject to liquidated or other contractual damages and remedies.
The financial covenants under our credit agreement may restrict our ability to make distributions and our operating and acquisition activities. If we breach the financial covenants we could be held in default under the credit agreement, which could accelerate our repayment date and materially adversely affect our liquidity and financial condition.
On May 8, 2013, we entered into a credit agreement with KeyBank National Association, JP Morgan Chase Bank National Association and other financial institutions to provide for a senior unsecured credit facility, which was subsequently expanded on November 5, 2013. The credit facility consists of a $300 million senior unsecured revolving line of credit and a $200 million unsecured term loan. We also have an accordion feature to increase available borrowings up to $800 million in certain circumstances with lenders’ consent.
As of December 31, 2013, we had borrowed the full amount of the term loan and had $299.8 million available under the revolving line of credit. This full recourse credit agreement requires compliance with certain financial covenants including: a minimum net worth requirement, restrictions on indebtedness, a distribution limitation and investment restrictions. These

22



covenants could prevent or inhibit our ability to make distributions to its stockholders and to pursue some business initiatives or effect certain transactions that may otherwise be beneficial to us.
The credit agreement also contains default provisions including the failure to (i) timely pay debt service: (ii) comply with financial and operating covenants in the credit agreement; or (iii) pay when due, all amounts outstanding under the credit agreement. Declaration of a default by the lenders under the credit agreement could restrict our ability to borrow additional monies and accelerate all amounts outstanding under the credit facility.
Risks Related to Our Common Stock
Since Inland American shares are not currently traded on a national stock exchange, there is no established public market for our shares and you may not be able to sell your shares.
Our shares of common stock are not listed on a national securities exchange. There is no established public trading market for our shares and no assurance that one may develop. Our charter also prohibits the ownership of more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or numbers whichever is more restrictive) of any class or series of shares of our stock by any single investor unless exempted by our board. This may inhibit investors from purchasing a large portion of our shares. Our charter also does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a national exchange by a specified date. There is no assurance the board will pursue a listing or other liquidity event. In addition, even if our board decides to seek a listing of our shares of common stock, there is no assurance that we will satisfy the listing requirements or that our shares will be approved for listing. If and when a listing occurs there is no guarantee you will be able to sell your common shares at a price equal to your initial investment value.
Our stockholders may not be able to sell some or all of their shares under our share repurchases program.
Our share repurchase program, which was effective through February 28, 2014, contained numerous restrictions that limited our stockholders' ability to sell their shares, including those relating to the number of shares of our common stock that we could repurchase at any given time and limiting the funds we could use to repurchase shares pursuant to the program. Under the program, we may repurchase shares of our common stock, on a quarterly basis only, from the beneficiary of a stockholder that has died or from stockholders that have a “qualifying disability” or are confined to a “long-term care facility” (together, referred to herein as “hardship repurchases”). Our program does not permit us to accept shares for repurchase for any other reason, further, we are authorized to repurchase shares at a price per share equal to 100% of the most recently disclosed estimated per share value of our common stock, which currently is equal to $6.94 per share. Our obligation to repurchase any shares under the program is further conditioned upon our having sufficient funds available to complete the repurchase. Through February 28, 2014, our board has reserved $10.0 million per calendar quarter for the purpose of funding repurchases associated with death and $15.0 million per calendar quarter for the purpose of funding hardship repurchases. If the funds reserved for either category of repurchase under the program are insufficient to repurchase all of the shares for which repurchase requests have been received for a particular quarter, or if the number of shares accepted for repurchase would cause us to exceed the 5.0% limit set forth therein, we will repurchase the shares in the following order: (1) for death repurchases, we will repurchase shares in chronological order, based upon the beneficial owner's date of death; and (2) for hardship repurchases, we will repurchase shares on a pro-rata basis, up to, but not in excess of, the limits described herein; provided, that in the event that the repurchase would result in a stockholder owning less than 150 shares, we will repurchase all of that stockholder's shares. Further, we have no obligation to repurchase shares if the repurchase would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
Since the repurchase price is equal to our estimated per share value of our common stock, a stockholder may receive less than the amount of their investment in the shares. Moreover, our directors have the discretion to suspend or terminate the program upon 30 days' notice. Therefore, our stockholders may not have the opportunity to make a repurchase request prior to a potential termination of the share repurchase program and our stockholders may not be able to sell any of their shares of common stock back to us. As a result of these restrictions and circumstances, the ability of our stockholders to sell their shares should they require liquidity is significantly restricted.
The estimated value of our common stock is based on a number of assumptions and estimates that may not be accurate or complete and is also subject to a number of limitations.
On December 27, 2013, we announced an estimated value of our common stock equal to $6.94 per share. The audit committee of the Company’s board of directors engaged Real Globe Advisors, LLC (“Real Globe”), an independent third-party real estated advisory firm to estimate the per share value of our common stock on a fully diluted basis as of December 31, 2013. As

23



with any methodology used to estimate value, the methodology employed by Real Globe and the recommendations made by our former business manager were based upon a number of estimates and assumptions that may not be accurate or complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated per share value does not represent the: (i) the amount at which our shares would trade at a national securities exchange, (ii) the amount a stockholder would obtain if he or she tried to sell his or her shares or (iii) the amount stockholders would receive if we liquidated our assets and distributed the proceeds after paying all of our expenses and liabilities. Accordingly, with respect to the estimated value per share, we can give no assurance that:
a stockholder would be able to resell his or her shares at this estimated value;
a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;
our shares would trade at a price equal to or greater than the estimated value per share if we listed them on a national securities exchange; or
the methodology used to estimate our value per share would be acceptable to FINRA or that the estimated value per share will satisfy the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”) with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.

There is no assurance that we will be able to continue paying cash distributions or that distributions will increase over time.
We pay regular monthly cash distributions to our stockholders. However, there are many factors that can affect the availability and timing of cash distributions such as our ability to earn positive yields on our real estate assets, the yields on securities of other entities in which we invest, our operating expense levels, as well as many other variables. Our long-term portfolio strategy may also affect our ability to pay our cash distributions if we are not able to reinvest the capital we receive from our properties dispositions, in a reasonable amount of time, into assets that generate cash flow yields similar to or greater than the properties sold. There is no assurance that we will be able to continue paying distributions at the current level or that the amount of distributions will increase, or not decrease, over time. Even if we are able to continue paying distributions, the actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available for distribution, which depends on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.
Funding distributions from sources other than cash flow from operating activities may negatively impact our ability to sustain or pay future distributions and results in us having less cash available for other uses, such as property purchases.
If our cash flow from operating activities is not sufficient to fully fund the payment of distributions, the level of our distributions may not be sustainable and some or all of our distributions will be paid from other sources. For the year ended December 31, 2013, distributions were paid from cash flow from operations, distributions from unconsolidated entities, and gain on sales of properties. We also may use cash from financing activities, components of which may include borrowings (including borrowings secured by our assets) and have used proceeds from the sales of our properties, to fund distributions. To the extent distributions are paid from these sources or gains on sales of assets, we will have less money available for other uses, such as cash needed to refinance existing indebtedness or for the purchase of new assets.
Risks Related to Our Organization and Structure
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including our investment policies and strategies, and policies regarding financing, debt and equity capitalization, REIT qualification and distributions. Our board of directors may amend or revise certain of these and other policies without a vote of the stockholders.
Stockholders' interest in us will be diluted if we issue additional shares.
Stockholders do not have preemptive rights to any shares issued by us in the future. Our articles authorize us to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Company has authority to issue. Future issuances of common stock, including issuances through our distribution reinvestment plan (“DRP”), reduce the percentage of our shares owned by our current stockholders who do not participate in future stock issuances. Stockholders are not entitled to vote on whether or not we issue additional shares. In addition, depending on the terms and pricing of an additional offering of our shares and the value of our properties, our stockholders may experience dilution in the

24



value of their shares. Further, our board could issue stock on terms and conditions that subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control in us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for our stockholders.
Stockholders' returns may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register our company or any of our subsidiaries, as an investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”). If we or any of our subsidiaries become obligated to register as an investment company, the registered entity would have to comply with regulation under the Investment Company Act with respect to capital structure (including the registered entity's ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act) and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration, and other matters. Compliance with the Investment Company Act would limit our ability to make certain investments and require us to significantly restructure our operations and business plan. The costs we would incur and the limitations that would be imposed on us as a result of such compliance and restructuring would negatively affect the value of our common stock, our ability to make distributions and the sustainability of our business and investment strategies.
We believe that neither we nor any subsidiaries we own fall within the definition of an investment company under Section 3(a)(1) of the Investment Company Act because we primarily engage in the business of investing in real property, through our wholly or majority owned subsidiaries, each of which has at least 60% of their assets in real property. The company conducts its operations, directly and through wholly or majority-owned subsidiaries, so that none of the company and its subsidiaries is registered or will be required to register as an investment company under the Investment Company Act. Section 3(a)(1) of the Investment Company Act, in relevant part, defines an investment company as (i) any issuer that is, or holds itself out as being, engaged primarily in the business of investing, reinvesting or trading in securities., or (ii) any issuer that is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns, or proposes to acquire, “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” The term “investment securities” generally includes all securities except government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exemption from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. We and our subsidiaries are primarily engaged in the business of investing in real property and, as such, fall outside of the definition of an investment company under Section 3(a)(1)(A) of the Investment Company Act. We also conduct our operations and the operations of our subsidiaries so that each complies with the 40% test.
Accordingly, we believe that neither we nor any of our wholly and majority-owned subsidiaries are considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. To rely upon Section 3(c)(5)(C) of the Investment Company Act as it has been interpreted by the SEC staff, an entity would have to invest at least 55% of its total assets in “mortgage and other liens on and interests in real estate,” which we refer to as “qualifying real estate investments” and maintain an additional 25% of its total assets in qualifying real estate investments or other real estate-related assets. The remaining 20% of the entity's assets can consist of miscellaneous assets. These criteria may limit what we buy, sell and hold.
We classify our assets for purposes of Section 3(c)(5)(C) based in large measure upon no-action letters issued by the SEC staff and other interpretive guidance provided by the SEC and its staff. The no-action positions are based on factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than twenty years ago. Pursuant to this guidance, and depending on the characteristics of the specific investments, certain mortgage-backed securities, other mortgage-related instruments, joint venture investments and the equity securities of other entities may not constitute qualifying real estate assets, and therefore, we may limit our investments in these types of assets. The SEC or its staff may not concur with the way we classify our assets. Future revisions to the Investment Company Act or further guidance from the SEC or its staff may cause us to no longer be in compliance with the exemption from the definition of an “investment company” provided by Section 3(c)(5)(C) and may force us to re-evaluate our portfolio and our investment strategy. To the extent that the SEC or its staff provides more specific or different guidance, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC or its staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

25



A change in the value of any of our assets could cause us to fall within the definition of “investment company” and negatively affect our ability to be free from registration and regulation under the Investment Company Act. To avoid being required to register the company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. Sales may be required during adverse market conditions, and we could be forced to accept a price below that which we would otherwise consider acceptable. In addition, we may have to acquire additional income or loss generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. Any such selling, acquiring or holding of assets driven by Investment Company Act considerations could negatively affect the value of our common stock, our ability to make distributions and the sustainability of our business and investment strategies.
If we or our subsidiaries were required to register as an investment company but failed to do so, we or the applicable subsidiary would be prohibited from engaging in our or its business, and criminal and civil actions could be brought against us or the applicable subsidiary. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Our rights, and the rights of our stockholders, to recover claims against our officers and directors are limited by Maryland law.
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 interest and with the care that an ordinary prudent person in a like position would use under similar circumstances. Our charter and bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for any claim or liability to which they may become subject or which they may incur by reason of their service as directors or officers. Maryland law generally permits a corporation to indemnify its directors and officers for losses, liabilities and expenses unless it is established that: (i) 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; (ii) the director or officer actually received an improper personal benefit in money, property or services; or (iii) in the case of a 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, which could reduce our and our stockholders’ recovery from these persons if they act in a negligent or grossly negligent manner. In addition, we may be obligated to fund the defense costs incurred by our officers and directors in some cases.
Our articles place limits on the amount of common stock that any person may own without the prior approval of our board of directors.
To qualify as a REIT, no more than 50% of the outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year. Our articles prohibit any persons or groups from owning more than 9.8% of our common stock without the prior approval of our board of directors. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets that might involve a premium price for holders of our common stock. Further, any person or group attempting to purchase shares exceeding these limits could be compelled to sell the additional shares and, as a result, to forfeit the benefits of owning the additional shares.
Our articles permit our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.
Our board of directors is permitted to issue preferred stock without stockholder approval. Further, our board may classify or reclassify any unissued preferred stock and establish the preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of any preferred stock. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the holder becomes an “interested

26



stockholder.” These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An “interested stockholder” is defined as:
any person who beneficially owns 10% or more of the voting power of the then outstanding voting stock of the corporation; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved, in advance, the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may condition its approval on compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the expiration of the five-year period described above, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of the then outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority voting requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a “control share acquisition.”
Under the Maryland Control Share Acquisition Act, persons or entities owning “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights with respect to those shares except to the extent approved by a vote of two-thirds of the corporation's disinterested stockholders. Shares of stock owned by the acquirer or by officers or directors who are employees of the corporation, are not considered disinterested for these purposes. “Control shares” are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:
one-tenth or more but less than one-third of all voting power;
one-third or more but less than a majority of all voting power; or
a majority or more of all voting power.
Control shares do not include shares of stock the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions. The Control Share Acquisition Act does not apply to (1) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by our articles or bylaws.
Federal Income Tax Risks
If we fail to qualify as a REIT, we will have less cash to distribute to our stockholders.
Our qualification as a REIT depends on our ability to meet requirements regarding our organization and ownership, distributions of our income, the nature and diversification of our income and assets as well as other tests imposed by the Code. We cannot assure you that our actual operations for any one taxable year will satisfy these requirements. Further, new legislation, regulations, administrative interpretations or court decisions could significantly affect our ability to qualify as a REIT and/or the federal income tax consequences of our qualification as a REIT. If we were to fail to qualify as a REIT and did not qualify for certain statutory relief provisions:

27



we would not be allowed to deduct distributions paid to stockholders when computing our taxable income;
we would be subject to federal, state and local income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;
we would be disqualified from being taxed as a REIT for the four taxable years following the year during which we failed to qualify, unless we qualify for certain statutory relief provisions;
we would have less cash to pay distributions to stockholders; and
we may be required to borrow additional funds or sell some of our assets in order to pay the corporate tax obligations we may incur as a result of being disqualified.
In addition, if we were to fail to qualify as a REIT, all distributions to stockholders that we did pay would be subject to tax as regular corporate dividends to the extent of our current and accumulated earnings and profits. This means that our U.S. stockholders who are taxed at individual rates would be taxed on our dividends at long-term capital gains rates of up to 20% and that our corporate stockholders generally would be entitled to the dividends received deduction with respect to such dividends, subject, in each case, to applicable limitations under the Code.
We are seeking closing agreements with the Internal Revenue Service (the “IRS”) granting us relief for potential failures to satisfy certain REIT qualification requirements, and we may have to pay a significant penalty even if the IRS grants our requests.
A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distributes at least 90% of its REIT taxable income (subject to certain adjustments) to its stockholders (the “90% Distribution Test”). We have identified certain distribution and stockholder reimbursement practices that may have caused certain dividends paid by the consolidated Inland American REIT and MB REIT (Florida), Inc. (“MB REIT”) to be treated as preferential dividends, which cannot be used to satisfy the 90% Distribution Requirement. We have also identified the ownership of certain assets by the Inland American REIT and MB REIT that may have violated a REIT qualification requirement that prohibits a REIT from owning "securities" of any one issuer in excess of 5% of the REIT's total assets at the end of any calendar quarter (the "5% Securities Test"). In order to provide greater certainty with respect to the qualification of the Inland American REIT and MB REIT as REITs for federal income tax purposes, management concluded that it was in our best interest and the best interest of our stockholders to request closing agreements from the IRS for both the Inland American REIT and MB REIT with respect to such matters. Accordingly, on October 31, 2012, MB REIT filed a request for a closing agreement with the IRS. Additionally, we filed a separate request for a closing agreement on behalf of the Inland American REIT on March 7, 2013.
We identified certain aspects of the calculation of certain dividends on MB REIT's preferred stock and also aspects of the operation of certain "set aside" provisions with respect to accrued but unpaid dividends on certain classes of MB REIT's preferred stock that may have caused certain dividends to be treated as preferential dividends. In the case of the Inland American REIT, management identified certain aspects of the operation of the dividend reinvestment plan and distribution procedures and also certain reimbursements of stockholder expenses that may have caused certain dividends to be treated as preferential dividends. If these practices resulted in preferential dividends, the Inland American REIT and MB REIT would not have satisfied the 90% Distribution Requirement and thus may not have qualified as REITs, which would result in substantial corporate tax liability for the years in which the Inland American REIT or MB REIT failed to qualify as REITs.
In addition, the Inland American REIT and MB REIT made certain overnight investments in bank commercial paper. While the Code does not provide a specific definition of “cash item”, we believe that overnight commercial paper should be treated as a “cash item”, which is not treated as a “security” for purposes of the 5% Securities Test. If treated as a "security", the bank commercial paper would appear to have represented more than 5% of the respective REIT's total assets at the end of certain calendar quarters. In the event this commercial paper is treated as a "security", we anticipate that we would be required to pay corporate income tax on the income earned with respect to the portion of the commercial paper that violated the 5% Securities Test.
We can provide no assurance that the IRS will accept the Inland American REIT's or MB REIT's closing agreement requests. Our former business manager has agreed to pay any penalty the IRS requires as a condition of granting the closing agreements.
To maintain REIT status, we may be forced to borrow funds or dispose of assets during unfavorable market conditions to make distributions to our stockholders, which could increase our operating costs and decrease the value of an investment in our company.
To qualify as a REIT, we must comply with the 90% Distribution Test each year. At times, we may not have sufficient funds to satisfy the 90% Distribution Test and may need to borrow funds or dispose of assets to make these required distributions and maintain our REIT status and avoid the payment of income and excise taxes. Our inability to satisfy the the 90% Distribution

28



Test with operating cash flow could result from (1) differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes; (2) the effect of non-deductible capital expenditures; (3) the creation of reserves; or (4) required debt amortization payments. We may need to borrow funds at times when market conditions are unfavorable. Further, if we are unable to borrow funds when needed for this purpose, we would have to find alternative sources of funding or risk losing our status as a REIT.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify 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 subject to tax on any undistributed income. We will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions we pay in any calendar year plus amounts retained for which federal income tax was paid are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.
If we have net income from the sale of foreclosure property that we hold primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, we must pay a tax on that income at the highest corporate income tax rate.
If we sell a property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business, our gain would be subject to the 100% “prohibited transactions” tax.
Our taxable REIT subsidiaries are subject to regular corporate federal, state and local taxes.
We will be subject to a 100% penalty tax on transactions with a taxable REIT subsidiary that are not conducted on an arm's-length basis.

Any of these taxes would decrease cash available for distributions to our stockholders.
The prohibited transactions tax may limit our ability to dispose of our properties , and we could incur a material tax liability if the IRS successfully asserts that the 100% prohibited transaction tax applies to some or all of our past or future dispositions.
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 transactions tax equal to 100% of net gain upon a disposition of a property. As part of our plan to refine our portfolio, we have selectively disposed of certain of our properties in the past and intend to make additional dispositions in the future. Although a safe harbor to the characterization of the sale of property by a REIT as a prohibited transaction is available, not all of our past dispositions have qualified for that safe harbor and some or all of our future dispositions may not qualify for that safe harbor. We believe that our past dispositions will not be treated as prohibited transactions, and we intend to avoid disposing of property that may be characterized as held primarily for sale to customers in the ordinary course of business. To avoid the prohibited transaction tax, we may choose not to engage in certain sales of our properties or may conduct such sales through a taxable REIT subsidiary, which would be subject to federal, state and local income taxation. Moreover, no assurance can be provided that the IRS will not assert that some or all of our past or future dispositions are subject to the 100% prohibited transactions tax.  If the IRS successfully imposes the 100% prohibited transactions tax on some or all of our dispositions, the resulting tax liability could be material.
We may fail to qualify as a REIT if the IRS successfully challenges the valuation of our common stock used for purposes of our DRP.
In order to satisfy the 90% Distribution Requirement, the dividends we pay must not be “preferential.” A dividend determined to be preferential will not qualify for the dividends paid deduction. To avoid paying preferential dividends, we must treat every stockholder of a class of stock with respect to which we make a distribution the same as every other stockholder of that class, and we must not treat any class of stock other than according to its dividend rights as a class. For example, if certain stockholders receive a distribution that is more or less than the distributions received by other stockholders of the same class, the distribution will be preferential. If any part of a distribution is preferential, none of that distribution will be applied towards satisfying the 90% Distribution Requirement.
Stockholders participating in our DRP receive distributions in the form of shares of our common stock rather than in cash. Currently, the purchase price per share under our DRP is equal to 100% of the “market price” of a share of our common stock. Because our common stock is not yet listed for trading, for these purposes, “market price” means the fair market value of a share of our common stock, as estimated by us. In the past, our DRP has offered participants the opportunity to acquire newly-

29



issued shares of our common stock at a discount to the “market price.” Pursuant to an IRS ruling, the prohibition on preferential dividends does not prohibit a REIT from offering shares under a distribution reinvestment plan at discounts of up to 5% of fair market value, but a discount in excess of 5% of the fair market value of the shares would be considered a preferential dividend. Any discount we have offered in the past was intended to fall within the safe harbor for such discounts set forth in the ruling published by the IRS. However, the fair market value of our common stock has not been susceptible to a definitive determination. If the purchase price under our DRP is deemed to have been at more than a 5% discount at any time, we would be treated as having paid one or more preferential dividends. Similarly, we would be treated as having paid one or more preferential dividends if the IRS successfully asserted that the value of the common stock distributions paid to stockholders participating in our DRP exceeded on a per-share basis the cash distribution paid to our other stockholders, which could occur if the IRS successfully asserted that the fair market value of our common stock exceeded the “market value” used for purposes of calculating the distributions under our DRP. If we are determined to have paid preferential dividends as a result of our DRP, we would likely fail to qualify as a REIT.
Complying with the REIT requirements may force us to liquidate otherwise attractive investments.
To maintain qualification as a REIT, we must 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 real estate assets, including shares of stock in other REITs, certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than governmental securities, qualified real estate assets and securities of taxable REIT subsidiaries) 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, qualified real estate assets and securities of taxable REIT subsidiaries) can consist of the securities of any one issuer, and no more than 25% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within thirty 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 in order to maintain our REIT status.
If our leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, pursuant to which specified percentages of our gross income must be passive income such as rent. For the rent we receive under our lease to be treated as qualifying income for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. There are no controlling Treasury regulations, published rulings or judicial decisions involving leases with terms substantially the same as our hotel leases that discuss whether such leases constitute true leases for federal income tax purposes. We believe that all of our leases, including our hotel leases, will be respected as true leases for federal income tax purposes. There can be no assurance, however, that the IRS will agree with this characterization. If a significant portion of our leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two gross income tests and each would likely lose its REIT status.
If MB REIT failed to qualify as a REIT, we would likely fail to qualify as a REIT.
We own 100% of the common stock of MB REIT, which owns a significant portion of our properties and has elected to be taxed as a REIT for federal income tax purposes. MB REIT is subject to the various REIT qualification requirements and other limitations that apply to us. We believe that MB REIT has operated and will continue to operate in a manner to permit it to qualify for taxation as a REIT for federal income tax purposes. However, if MB REIT were to fail to qualify as a REIT, then (1) MB REIT would become subject to regular corporation income tax and (2) our ownership of shares MB REIT would cease to be a qualifying real estate asset for purposes of the 75% asset test applicable to REITs and would become subject to the 5% asset test, the 10% vote test, and the 10% value test generally applicable to our ownership in corporations other than REITs, qualified REIT subsidiaries and taxable REIT subsidiaries. If MB REIT were to fail to qualify as a REIT, we would not satisfy the 5% asset test, the 10% value test, or the 10% vote test, in which event we would fail to qualify as a REIT unless we qualified for certain statutory relief provisions.
If our hotel managers 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 will not be qualifying income for purposes of the two gross income tests applicable to REITs. We lease our hotels to certain of our taxable REIT subsidiaries. A taxable REIT subsidiary 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 that hotels that our taxable REIT subsidiaries lease are managed by an “eligible independent contractor.”

30



We believe that the rent paid by our taxable REIT subsidiaries that lease our hotels is qualifying income for purposes of the REIT gross income tests and that our taxable REIT subsidiaries qualify to be treated as “taxable REIT subsidiaries” for 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 the IRS successfully challenged this treatment, we would likely fail to satisfy the asset tests applicable to REITs and a significant portion of our income would fail to qualify for the gross income tests. If we failed to satisfy either the asset or gross income tests, we would likely lose our REIT qualification for federal income tax purposes, unless we qualified for certain statutory relief provisions.
If our hotel managers do not qualify as “eligible independent contractors,” we may fail to qualify as a REIT. Each of the hotel management companies that enters into a management contract with our taxable REIT subsidiaries that lease our hotels must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by taxable REIT subsidiaries to be qualifying income for gross income tests. Among other requirements, in order to qualify as an eligible independent contractor, (1) a manager must be actively engaged in the trade or business of operating hotels for third parties at the time the manger enters into a management contract with a taxable REIT subsidiary lessee and (2) the 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. Although we believe that all of our hotel managers qualify as eligible independent contractors, no complete assurance can be provided that the IRS will not successfully challenge that position.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk with respect to borrowings made to acquire or carry real estate assets generally will not constitute gross income for purposes of the two gross income tests applicable to REITs, so long as we clearly identify any such transactions as hedges for tax purposes before the close of the day on which they are acquired or entered into and we satisfy other identification requirements. In addition, any income from other hedging transactions would generally not constitute gross income for purposes of both the gross income tests. Accordingly, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.
Legislative or regulatory action could adversely affect you.
Changes to the tax laws are likely to occur, and these changes may adversely affect the taxation of our stockholders. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Future legislation might result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed, for federal income tax purposes, as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders. You are urged to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our stock.
The taxation of dividends may adversely affect the value of our stock.
The maximum 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, are generally not eligible for the reduced rates on qualified dividend income. 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.

Item 1B. Unresolved Staff Comments
None.

31


Item 2. Properties

We own interests in retail, lodging, student housing, and non-core properties. As of December 31, 2013, we, directly or indirectly, including through joint ventures in which we have a controlling interest, owned an interest in 178 properties, excluding our lodging and development properties, located in 31 states and the District of Columbia. In addition, we, through our wholly-owned subsidiaries, Inland American Winston Hotels, Inc., Inland American Orchard Hotels, Inc., Inland American Urban Hotels, Inc., and Inland American Lodging Corporation, own 99 lodging properties in 26 states and the District of Columbia. (Dollar amounts stated in thousands, except for revenue per available room, average daily rate and average rent per square foot).
Not included in the property count of 178 properties are 224 properties that are held for sale as of December 31, 2013. These 224 properties are expected to be sold in 2014. In accordance with GAAP, we classify properties as held for sale when certain criteria are met. On the day that the criteria are met, we suspend depreciation on the properties held for sale, including depreciation for tenant improvements and additions, as well as the amortization of acquired in-place leases. Although we still hold these properties as of December 31, 2013, the assets and liabilities associated with those investment properties that are held for sale are classified separately on the consolidated balance sheets for the most recent reporting period and recorded at the lesser of the carrying value or fair value less costs to sell. At December 31, 2013, these assets were recorded at their carrying value. Furthermore, the operations for the periods presented are classified on the consolidated statements of operations and other comprehensive income as discontinued operations for all periods presented.
General
The following table sets forth information regarding the ten largest individual tenants in descending order based on annualized rent paid in 2013 but excluding our lodging and student housing properties. Annualized rent is computed as revenue for the last month of the period multiplied by twelve months. Average rent per square foot is computed as annualized rent divided by the total occupied square footage at the end of the period. Annualized rent includes the effect of rent abatements, lease inducements and straight-line rent GAAP adjustments. Physical occupancy is defined as the percentage of total gross leasable area actually used or occupied by a tenant. Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by that tenant of the area being leased.
 
Tenant Name
Type
 
Total Annualized Rental Income 
2013 ($)
 
Percent of 
Total Annualized Income
 
Gross Leasable Area
 
Percentage of Gross Leasable Area
AT&T
Non-core
 
$28,087
 
9.40%
 
1,943,177
 
8.99%
The Geo Group, Inc.
Non-core
 
9,850

 
3.30%
 
301,029
 
1.39%
Ross Dress for Less
Retail
 
8,407

 
2.81%
 
823,616
 
3.81%
Lockheed Martin
Non-core
 
8,007

 
2.68%
 
347,233
 
1.61%
Best Buy
Retail
 
7,790

 
2.61%
 
551,785
 
2.55%
Imagine
Non-core
 
7,687

 
2.57%
 
364,710
 
1.69%
Publix
Retail
 
6,011

 
2.01%
 
664,287
 
3.07%
Tom Thumb
Retail
 
5,875

 
1.97%
 
626,533
 
2.90%
Bed Bath & Beyond
Retail
 
4,883

 
1.63%
 
464,970
 
2.15%
Petsmart
Retail
 
4,772

 
1.60%
 
371,615
 
1.72%
Totals
 
 
$91,369
 
 
 
6,458,955
 
 

The following sections set forth certain summary information about the character of the properties that we owned at December 31, 2013. Certain of the Company’s properties, both continuing and those classified as held for sale, are encumbered by mortgages, totaling $4,731,709. Additional detail about the properties can be found on Schedule III – Real Estate and Accumulated Depreciation.


32


Retail Segment
As of December 31, 2013, our retail segment consisted of 119 properties, with an average of approximately 143,000 square feet of total space, located in stable communities, primarily in the eastern regions of the country. Our retail tenants are largely necessity-based retailers such as grocery and pharmacy. We own the following types of retail centers:
Community or neighborhood centers which are generally open air and designed for tenants that offer a larger array of apparel and other soft goods. Typically, community centers contain anchor stores and other national retail tenants. Our neighborhood shopping centers are generally in-line strip centers with a grocery store anchor, a drugstore, and other small retailers. Tenants of these centers typically offer necessity-based products.
Power centers consist of several anchors, such as department stores, off-price stores, warehouse clubs or stores that offer a large selection of merchandise. Typically, the number of specialty tenants is limited.
We have not experienced bankruptcies or receivable write-offs in our retail portfolio that have materially impacted our result of operations. Our retail business is not highly dependent on specific retailers or specific retail industries, which we believe shields the portfolio from significant revenue variances over time.
The following table reflects the types of properties within our retail segment as of December 31, 2013.
 
Retail Properties
Number
of
Properties
 
Total Gross
Leasable 
Area (GLA)
(Sq. Ft.)
 
Percentage of 
Economic
Occupancy as of
December 31,
2013
 
Total Number of
Financially
Active Leases 
as of
December 31, 2013
 
Total
Annualized
Rent ($)
 
Average Rent
PSF ($)
Community & Neighborhood Center
70
 
6,433,110

 
90%
 
981
 
$82,359
 
$14.29
Power Center
49
 
10,598,387

 
91%
 
1,036
 
126,904

 
13.14

 
119
 
17,031,497

 
91%
 
2,017
 
$209,263
 
$13.57
The following table represents lease expirations for the retail segment:
Lease Expiration Year
Number of
Expiring 
Leases
 
GLA of 
Expiring
Leases
(Sq. Ft.)
 
Annualized
Rent of Expiring
Leases ($)
 
Percent of
Total GLA
 
Percent of 
Total
Annualized 
Rent
 
Expiring
Rent/Square
Foot ($)
2014
279
 
1,195,197

 
$16,975
 
7.8%
 
8.0%
 
$14.20
2015
334
 
2,215,575

 
27,678

 
14.4%
 
13.1%
 
12.49

2016
315
 
1,837,929

 
26,206

 
11.9%
 
12.4%
 
14.26

2017
353
 
1,827,469

 
31,418

 
11.8%
 
14.9%
 
17.19

2018
287
 
1,853,358

 
27,701

 
12.0%
 
13.2%
 
14.95

2019
156
 
1,977,913

 
24,954

 
12.8%
 
11.8%
 
12.62

2020
57
 
795,303

 
11,096

 
5.2%
 
5.4%
 
13.95

2021
48
 
510,207

 
6,794

 
3.3%
 
3.2%
 
13.32

2022
44
 
802,338

 
9,975

 
5.2%
 
4.7%
 
12.43

2023
47
 
701,950

 
9,706

 
4.6%
 
4.6%
 
13.83

Thereafter
91
 
1,694,491

 
18,388

 
11.0%
 
8.7%
 
10.85

 
2,011
 
15,411,730

 
$210,890
 
100%
 
100%
 
$13.68
We believe the percentage of leases expiring over the next five years of 12%, is a manageable percentage of lease rollover. We believe that we have staggered our lease expirations so that we can manage lease rollover.


33


The following table represents lease spread metrics for leases that commenced in 2013 compared to expiring leases for the prior tenant in the same unit:

Number of Leases Commenced
2013
GLA SF
New Contractual Rent per Square Foot ($PSF) (a)
Prior Contractual Rent ($PSF) (a)
% Change over Prior Contract Rent (a)
Weighted Average Lease Term (b)
Tenant Improvement Allowance ($PSF)
Lease Commissions ($PSF)
Comparable Renewal Leases (c)
249
1,200,378
$15.72
$15.27
3.0%
4.34
$0.35
$0.05
Comparable New Leases (c)
40
282,739
13.96
12.54
11.3%
4.64
5.89
2.45
Non-Comparable Renewal and New Leases
87
415,211
12.03
—%
4.86
11.34
3.60
Total
376
1,898,328
$15.38
$14.75
4.3%
4.50
$3.58
$1.18
(a) Non-comparables are not included in totals.
(b) Month-to-month leases do not have expiration date and are not included in weighted avg lease term.
(c) Comparable lease is defined as a lease that meets all of the following criteria: same unit, leased within one year of prior tenant, square footage of unit stayed the same or within 10% of prior unit square footage.

In 2013, we executed 121 new leases and 255 renewals for 1.9 million square feet of GLA, of which 40 and 249 were comparable, respectively. For our comparable new leases, contractual base rent increased 11.3% from prior contractual base rent, going from $12.54 to $13.96 per square foot. The weighted average term is 4.64 years, with tenant improvement allowances at $5.89 per square foot and lease commissions at $2.45 per square foot. Similarly, our comparable renewed leases saw rent growth of 2.91%, increasing from $15.27 to $15.72 per square foot. The weighted average term is 4.34 years, with tenant improvement allowances at $0.35 per square foot and lease commissions at $0.05 per square foot. We also had 87 non-comparable leases commence in 2013 with contractual base rents starting at $12.03 per square foot and a weighted average term of 4.86 years. Tenant improvement allowances and lease commissions were $11.34 and $3.60 per square foot, respectively.

Tenant improvements allowances were primarily given for our new leases. The largest four leases represent 29% of the total given. Lease commissions were also primarily paid to our brokers for our new deals. The largest two commissions comprised 16% of the total paid.

As of December 31, 2012, we had 364 leases set to expire in 2013 of which the gross leaseable area of those leases was 1.5 million square feet. We are encouraged by our 2013 lease activity having achieved a comparable new and renewal rate of approximately 80% by number of leases.
Lodging Segment
Lodging facilities have characteristics different from those found in retail, student housing, and non-core properties. Revenue, operating expenses, and net income of lodging properties are directly tied to the daily hotel sales operation whereas these other asset classes generate revenue from medium to long-term lease contracts. Lodging facilities have the benefit of capturing increased revenue opportunities on a daily or weekly basis but are also subject to immediate decreases in lodging revenue as a result of declines in daily rental rates or daily occupancy when demand is reduced. Due to seasonality, we expect our lodging revenues to be greater during the second and third quarters with lower revenues in the first and fourth quarters.
We follow two practices common for REITs that own lodging properties: 1) association with national franchise organizations and 2) management of the properties by third-party hotel managers. We have aligned our portfolio with what we believe are the top franchise enterprises in the lodging industry: Marriott, Hilton, Intercontinental, Hyatt, Fairmont, and Starwood Hotels. By entering into franchise agreements with these organizations, we believe our lodging operations benefit from enhanced advertising, marketing, and sales programs through the franchisor (in this case, the organization) while the franchisee (in this case, us) pays only a fraction of the overall cost for these programs. Additionally, by using the franchise system we are also able to benefit from the frequent traveler rewards programs or “point awards” systems of the franchisor which we believe further bolsters occupancy and overall daily rental rates.


34


The majority of our lodging facilities and these franchise enterprises are classified in the “upscale” or “upper-upscale” lodging categories. The classifications are defined by Smith Travel Research, an independent provider of lodging industry statistical data. The classification of a property is based on lodging industry standards, which take into consideration many factors such as guest facilities and amenities, level of service and quality of accommodations.
The following table reflects the types of properties within our lodging segment as of December 31, 2013.
Lodging Properties
Number
of
Properties
 
Number 
of
Rooms
 
Average
Occupancy for
the Year ended
December 31, 2013
 
Average Revenue Per
Available Room for
the Year ended
December 31, 2013 ($)
 
Average Daily
Rate for the
Year 2013 ($)
Luxury
5
 
1,281
 
68%
 
$126
 
$185
Upper-Upscale
27
 
8,319
 
73%
 
114
 
156
Upscale
62
 
9,020
 
74%
 
97
 
130
Upper-Midscale
5
 
717
 
76%
 
100
 
132
 
99
 
19,337
 
73%
 
$105
 
$143


Student Housing Segment
Our student housing portfolio consists of residential and mixed-use communities located close to university campuses and in urban infill locations. The student housing properties are high-end properties with amenities such as fitness centers, swimming pools, multimedia lounges, and sports courts. Most of the properties are marketed under the "University House" brand. We are increasing the size of our student housing portfolio through acquisitions and developments. In 2013, we acquired three properties and placed one property in service. The properties are leased on a per bed basis and typically are one year leases commencing in the fall season in conjunction with the beginning of the school year.
The following table reflects the types of properties within our student-housing segment as of December 31, 2013.
 
 
Number of Properties
 
Total Beds
 
% of Economic
Occupancy as of
December 31, 2013
 
Total No. of
Beds Occupied
 
Rent per
Bed ($)
Student Housing
14
 
8,290
 
92%
 
7,632
 
$724


Non-core Segment
We are executing our long-term portfolio strategy by focusing on three specific real estate asset classes - retail, lodging, and student housing. The remaining assets outside of these asset classes are grouped together in the non-core segment. Our non-core segment is comprised of office properties, office and retail bank branches, single tenant retail properties, net lease properties and one conventional multi-family property.
The following table reflects the types of properties within our non-core segment as of December 31, 2013.
Non-core
Number of
Properties
 
Total Gross
Leasable 
Area
(Sq. Ft.)
 
Percentage of 
Economic
Occupancy as of
December 31,
2013
 
Total No. of
Financially
Active Leases 
as of
December 31, 2013
 
Sum of
Annualized
Rent ($)
 
Average Rent
PSF / Unit ($)
Single tenant retail
10
 
317,832

 
91%
 
7
 
$
3,571

 
$12.32
Office
10
 
3,551,858

 
85%
 
20
 
51,099

 
16.93

Correctional facility
2
 
457,345

 
100%
 
2
 
12,076

 
26.40

Charter schools
8
 
364,710

 
100%
 
8
 
7,687

 
21.08

Distribution centers
14
 
2,371,404

 
87%
 
25
 
15,124

 
7.33

Conventional multi-family
1
 
194,097

 
97%
 
246
 
3,462

 
$1,173
 
45
 
7,257,246

 
88%
 
308
 
$
93,019

 
 

35


The following table represents lease expirations for the non-core segment, exclusive of multi-family lease activity:
Lease Expiration Year
Number of
Expiring 
Leases
 
GLA of 
Expiring
Leases
(Sq. Ft.)
 
Annualized
Rent of Expiring
Leases ($)
 
Percent of
Total GLA
 
Percent of 
Total
Annualized 
Rent
 
Expiring
Rent/Square
Foot ($)
2014
10
 
935,350

 
$9,351
 
15.1%
 
10.3%
 
$10.00
2015
9
 
217,089

 
2,560

 
3.5%
 
3.0%
 
11.79

2016
11
 
2,315,448

 
33,732

 
37.4%
 
37.3%
 
14.57

2017
5
 
270,775

 
5,167

 
4.4%
 
5.7%
 
19.08

2018
8
 
345,044

 
7,721

 
5.6%
 
8.5%
 
22.38

2019
4
 
676,863

 
8,370

 
10.9%
 
9.3%
 
12.37

2020
2
 
329,909

 
10,127

 
5.3%
 
11.2%
 
30.70

2021
2
 
226,979

 
3,268

 
3.7%
 
3.6%
 
14.40

2022
1
 
20,845

 
575

 
0.3%
 
0.6%
 
27.58

2023
 

 

 
—%
 
—%
 

Thereafter
10
 
854,359

 
9,536

 
13.8%
 
10.5%
 
11.16


62
 
6,192,661

 
$90,408
 
100%
 
100%
 
$14.60
We believe the percentage of leases expiring over the next five years, ranging from 3% to 10%, except for 2016, is a manageable percentage of lease rollover. In 2016, the lease expires for a property with approximately 1.7 million square feet, occupied by AT&T in Hoffman Estates, Illinois, which is in the greater metro Chicago market.


36



Item 3. Legal Proceedings
As previously disclosed, the SEC is conducting a non-public, formal, fact-finding investigation ("SEC Investigation") to determine whether there have been violations of certain provisions of the federal securities laws regarding our business manager fees, property management fees, transactions with our affiliates, timing and amount of distributions paid to our investors, determination of property impairments, and any decision regarding whether we might become a self-administered REIT. We have not been accused of any wrongdoing by the SEC. We also have been informed by the SEC that the existence of this investigation does not mean that the SEC has concluded that anyone has broken the law or that the SEC has a negative opinion of any person, entity, or security. We have been cooperating fully with the SEC.
We cannot reasonably estimate the timing of the investigation, nor can we predict whether or not the investigation might have a
material adverse effect on our business.
We have also received related demands (“Derivative Demands”) by stockholders to conduct investigations regarding claims that our officers, our board of directors, our former business manager, and affiliates of our former business manager (the “Inland American Parties”) breached their fiduciary duties to us in connection with the matters that we disclosed are subject to the SEC Investigation. The first Derivative Demand claims that the Inland American Parties (i) falsely reported the value of our common stock until September 2010; (ii) caused us to purchase shares of our common stock from stockholders at prices in excess of their value; and (iii) disguised returns of capital paid to stockholders as REIT income, resulting in the payment of fees to our former business manager for which it was not entitled. The three stockholders in that demand contend that legal proceedings should seek recovery of damages in an unspecified amount allegedly sustained by us. The second Derivative Demand by another shareholder makes similar claims and further alleges that the Inland American Parties (i) caused us to engage in transactions that unduly favored related parties, (ii) falsely disclosed the timing and amount of distributions, and (iii) falsely disclosed whether we might become a self-administered REIT. We also received a letter from another stockholder that fully adopts and joins in the first Derivative Demand, but makes no additional demands on us to perform investigation or pursue claims.
Upon receiving the first of the Derivative Demands, the full board of directors responded by authorizing the independent directors to investigate the claims contained in the first Derivative Demand, any subsequent stockholder demands, as well as any other matters the independent directors see fit to investigate, including matters related to the SEC Investigation. Pursuant to this authority, the independent directors have formed a special litigation committee that is comprised solely of independent directors to review and evaluate the matters referred by the full Board to the independent directors, and to recommend to the full Board any further action as is appropriate. The special litigation committee is investigating these claims with the assistance of independent legal counsel and will make a recommendation to the Board of Directors after the committee has completed its investigation.
On March 21, 2013, counsel for the stockholders who made the first Derivative Demand filed a derivative lawsuit in the Circuit Court of Cook County, Illinois, on behalf of the Company. The case has been stayed pending completion of the special litigation committee's investigation. We cannot reasonably estimate the timing of the special litigation committee investigation or the Derivative Demands, nor can we predict whether or not the special litigation committee investigation or Derivative Demands might have a material adverse effect on our business.
On April 26, 2013, two of our stockholders filed a putative class action in the United States District Court for the Northern District of Illinois against the Company, and current members and one former member of our board of directors ("the Defendants"). The complaint sought damages on behalf of plaintiffs and similarly situated individuals who purchased additional shares in the Company pursuant to our Distribution Reinvestment Plan ("DRP") on or after March 30, 2009. Plaintiffs allege that the Defendants breached their fiduciary duties to plaintiffs and to members of the putative class by inflating the yearly estimated share price announced by the Company and by selling shares in the DRP to plaintiffs and members of the putative class at those allegedly inflated prices. On November 18, 2013, the class action complaint was dismissed with prejudice for failing to state a claim that would entitle the plaintiffs to relief. The Court disagreed with the plaintiffs' allegations, noting in its memorandum opinion and order that the Company’s public disclosures fully described the manner in which the board estimated share value for the Company’s stock sold through the DRP. The Court entered judgment in favor of the Defendants. The plaintiffs appealed the judgment. As of February 26, 2014, the parties entered into a settlement agreement whereby the plaintiffs agreed to dismiss their appeal in exchange for a cash settlement from the Company. We believe that the amount of this settlement is not material, and is less than the amount the Defendants would have incurred in defending the appeal.

Item 4. Mine Safety Disclosures
Not applicable.


37



PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information

Our shares of common stock are not listed on a national securities exchange and there is not otherwise an established public trading market for our shares. We publish an estimated per share value of our common stock to assist broker dealers that sold our common stock in our initial and follow-on “best efforts” offerings to comply with the rules published by the Financial Industry Regulatory Authority (“FINRA”).  On December 27, 2013, we announced an estimated value of our common stock equal to $6.94 per share.

The audit committee of our board of directors (“Audit Committee”) engaged Real Globe Advisors, LLC (“Real Globe”), an independent third-party real estate advisory firm to estimate the per share value of our common stock on a fully diluted basis as of December 31, 2013. Real Globe has extensive experience estimating the fair values of commercial real estate. The report furnished to the Audit Committee by Real Globe complies with the reporting requirements set forth under Standard Rule 2-2(b) of the Uniform Standards of Professional Appraisal Practice and is certified by a member of the Appraisal Institute with the MAI designation. The Real Globe report, dated December 17, 2013, reflects values as of December 31, 2013. Real Globe does not have any direct or indirect interests in any transaction with us or in any currently proposed transaction to which we are a party, and there are no conflicts of interest between Real Globe, on one hand, and ourselves, the business manager or any of our directors, on the other.

To estimate our per share value, Real Globe utilized the “net asset value” or “NAV” method which is based on the fair value of real estate, real estate related investments and all other assets, less the fair value of our total liabilities. The fair value estimate of our real estate assets is equal to the sum of the fair value estimates for its individual real estate assets. Generally, Real Globe estimated the value of our wholly owned real estate and real estate-related assets, such as joint ventures, using a discounted cash flow or “DCF” of projected net operating income, less capital expenditures, for each property, for the ten-year period ending December 31, 2023, and applying a “market supported” discount rate and capitalization rate. For all other assets including cash, other current assets and marketable securities, fair value was determined separately. Real Globe also estimated the fair value of our long-term debt obligations, including the current liabilities, by comparing current market interest rates to the contract rates on our long-term debt and discounting to present value the difference in future payments. Real Globe determined NAV in a manner consistent with the definition of fair value under U.S. generally accepted accounting principles set forth in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 Fair Value Measurements and Disclosures.

Our business manager analyzed Real Globe’s report, which was based on capitalization and discount rates derived from third quarter 2013 industry published reports. For its analysis, the business manager used fourth quarter 2013 market data, from both third party sources and management’s industry knowledge (including the Company’s recent experience buying and selling real estate assets) to assess current trends and potential values. Based on this analysis, our business manager recommended to our Audit Committee an estimated share value within the Real Globe range, equal to $6.94 per share. On December 19, 2013, the Audit Committee met to review and discuss Real Globe’s report and our business manager’s recommendation. After meeting with each of them, the Audit Committee unanimously adopted a resolution accepting the Real Globe analysis and our business manager’s recommendation. At a full meeting of our board of directors also held on December 19, 2013, the Audit Committee made a recommendation to the board that the Company publish an estimate of share value as of December 31, 2013 equal to $6.94 per share. The board unanimously adopted this recommendation of estimated per share value, which assumes a weighted average exit capitalization rate equal to 7.52% and a discount rate equal to 9.16%. Real Globe considered this reasonable because each fell within the range of values included in its report.
As with any methodology used to estimate value, the methodology employed by Real Globe and the recommendations made by our business manager were based upon a number of estimates and assumptions that may not be accurate or complete. Further, different parties using different assumptions and estimates could derive a different estimated value per share, which could be significantly different from our estimated value per share. The estimated per share value does not represent the: (i) the amount at which our shares would trade at a national securities exchange, (ii) the amount a stockholder would obtain if he or she tried to sell his or her shares or (iii) the amount stockholders would receive if we liquidated our assets and distributed the proceeds after paying all of our expenses and liabilities. Accordingly, with respect to the estimated value per share, we can give no assurance that:

a stockholder would be able to resell his or her shares at this estimated value;

38



a stockholder would ultimately realize distributions per share equal to our estimated value per share upon liquidation of our assets and settlement of our liabilities or a sale of the Company;
our shares would trade at a price equal to or greater than the estimated value per share if we listed them on a national securities exchange; or
the methodology used to estimate our value per share would be acceptable to FINRA or that the estimated value per share will satisfy the applicable annual valuation requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Internal Revenue Code of 1986, as amended (the “Code”) with respect to employee benefit plans subject to ERISA and other retirement plans or accounts subject to Section 4975 of the Code.
 
The estimated value per share was unanimously adopted by our board on December 19, 2013 and reflects the fact that the estimate was calculated at a moment in time. The value of our shares will likely change over time and will be influenced by changes to the value of our individual assets as well as changes and developments in the real estate and capital markets. We currently expect to update our estimated value per share at least every twelve months. Nevertheless, stockholders should not rely on the estimated value per share in making a decision to buy or sell shares of our common stock.
Share Repurchase Program
Our board of directors adopted a share repurchase program, which became effective August 31, 2005 and was suspended as of March 30, 2009. Our board later adopted an Amended and Restated Share Repurchase Program, which was effective from April 11, 2011 through January 31, 2012. Our board subsequently adopted a Second Amended and Restated Share Repurchase Program (the “Second Amended Program”), which became effective February 1, 2012 and was suspended as of February 28, 2014. The board voted to suspend the Second Amended Program on January 29, 2014. We anticipate reinstating the Share Repurchase Program later in the year.
Under the Second Amended Program, we were permitted to repurchase shares of our common stock, on a quarterly basis, from the beneficiary of a stockholder that had died or from stockholders that had a “qualifying disability” or were confined to a “long-term care facility” (together, referred to herein as “hardship repurchases”). We were authorized to repurchase shares at a price per share equal to 100% of the most recently disclosed estimated per share value of our common stock, which was equal to $6.93 per share as of December 19, 2012 and $6.94 per share as of December 27, 2013. Our obligation to repurchase any shares under the Second Amended Program was conditioned upon our having sufficient funds available to complete the repurchase. Our board had initially reserved $10.0 million per calendar quarter for the purpose of funding repurchases associated with death and $15.0 million per calendar quarter for the purpose of funding hardship repurchases. In addition, notwithstanding anything to the contrary, at no time during any consecutive twelve month period may the aggregate number of shares repurchased under the Second Amended Program have exceeded 5.0% of the aggregate number of issued and outstanding shares of our common stock at the beginning of the twelve month period. For any calendar quarter, if the number of shares accepted for repurchase would have caused us to exceed the 5.0% limit, repurchases for death would have taken priority over any hardship repurchases, in each case in accordance with the procedures, and subject to the funding limits, described in the Second Amended Program and summarized herein.
If, on the other hand, the funds reserved for either category of repurchase under the Second Amended Program were insufficient to repurchase all of the shares for which repurchase requests have been received for a particular quarter, or if the number of shares accepted for repurchase would have caused us to exceed the 5.0% limit, we would have repurchased the shares in the following order:
for death repurchases, we would repurchase shares in chronological order, based upon the beneficial owner’s date of death; and
for hardship repurchases, we would repurchase shares on a pro rata basis, up to, but not in excess of, the limits described herein; provided, that in the event that the repurchase would result in a stockholder owning less than 150 shares, we would repurchase all of that stockholder’s shares.
The table below outlines the shares of common stock we repurchased pursuant to the Second Amended Program during the three months ended December 31, 2013:


39



As of month ended,
Total Number of Share Requests (2)
Total Number of
Shares Repurchased (2)
 
Average Price Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
 
Maximum
Number of Shares
That May Yet be
Purchased Under the
Plans or Programs
October 31, 2013 (3)

1,731,356

 
$
6.93

 
1,731,356

 
(1
)
November 30, 2013


 
N/A

 

 
(1
)
December 31, 2013 (4)
1,077,829


 
N/A

 

 
(1
)
(1)
A description of the Second Amended Program, including the date that the program was amended, the dollar amount approved, the expiration date and the maximum number of shares that may be purchased thereunder is included in the narrative preceding this table.
(2)
Beginning in April 2012, shares were repurchased in the subsequent quarter that share requests were received.
(3)
There were 1,731.356 share requests outstanding as of the month ended September 30, 2013, which were repurchased in October 2013 at a price of $6.93 per share.
(4)
All share requests outstanding as of the month ended December 31, 2013 were repurchased in January 2014 at a price of $6.94 per share.
Stockholders
As of March 11, 2014, we had 184,020 stockholders of record.
Distributions
We have been paying monthly cash distributions since October 2005. During the years ended December 31, 2013 and 2012, we declared cash distributions, which are paid monthly in arrears to stockholders, totaling $450.1 million and $440.0 million, respectively, in each case equal to $0.50 per share on an annualized basis. During the years ended December 31, 2013 and 2012, we paid cash distributions of $449.3 million and $439.2 million, respectively. For Federal income tax purposes for the years ended December 31, 2013 and 2012, 0% and 87% of the distributions paid constituted a return of capital in the applicable year, respectively. The remaining portion of the distributions paid constituted ordinary income.

We intend to continue paying regular monthly cash distributions to our stockholders. However, there are many factors that can affect the amount and timing of cash distributions to stockholders. There is no assurance that we will be able to continue paying distributions at the current level or that the amount of distributions will increase, or not decrease further, over time. Even if we are able to continue paying distributions, the actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available for distribution, which depends on items such as current and projected cash requirements and tax considerations. As a result, our distribution rate and payment frequency may vary from time to time.

Notification Regarding Payments of Distributions
Shareholders should be aware that the method by which a shareholder has chosen to receive his or her distributions affects the timing of the shareholder's receipt of those distributions. Specifically, under our transfer agent's payment processing procedures, distributions are paid in the following manner:
(1) those shareholders who have chosen to receive their distributions via ACH wire transfers receive their distributions on the distribution payment date (as determined by our Board of Directors);
(2) those shareholders who have chosen to receive their distributions by paper check are typically mailed those checks on the distribution payment date, but sometimes paper checks are mailed on the day following the distribution payment date; and
(3) for those shareholders holding shares through a broker or other nominee, the distributions payments are wired, or paper checks are mailed, to the broker or other nominee on the day following the distribution payment date.
All shareholders who hold shares directly in record name may change at any time the method through which they receive their distributions from our transfer agent, and those shareholders will not have to pay any fees to us or our transfer agent to make such a change. Also, all shareholders are eligible to participate at no cost in our DRP. Accordingly, each shareholder may select the timing of receipt of distributions from our transfer agent by selecting the method above that corresponds to the desired timing for receipt of the distributions. Because all shareholders may elect to have their distributions sent via ACH wire on the distribution payment date or credited on the distribution payment date to their DRP, we treat all of our shareholders,

40



regardless of the method by which they have chosen to receive their distributions, as having constructively received their distributions from us on the distribution payment date for federal income tax purposes.

Shareholders who hold shares directly in record name and who would like to change their distribution payment method should complete a “Change of Distribution Election Form.” Also, shareholders who would like to participate in our DRP should complete the “Change of Distribution Election Form.” The form is available on our website under “Investor Relations-Forms.”

We note that the payment method for shareholders who hold shares through a broker or nominee is determined by the broker or nominee. Similarly, the payment method for shareholders who hold shares in a tax-deferred account, such as an IRA, is generally determined by the custodian for the account. Shareholders that currently hold shares through a broker or other nominee and would like to receive distributions via ACH wire or paper check should contact their broker or other nominee regarding their processes for transferring shares to record name ownership. Similarly, shareholders who hold shares in a tax-deferred account may need to hold shares outside of their tax-deferred accounts to change the method through which they receive their distributions. Shareholders who hold shares through a tax-deferred account and who would like to change the method through which they receive their distributions should contact their custodians regarding the transfer process and should consult their tax advisor regarding the consequences of transferring shares outside of a tax-deferred account.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information regarding our equity compensation plans as of December 31, 2013.
Equity Compensation Plan Information
 
Number of securities 
to be issued upon
exercise of
outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants
and rights
 
Number of  securities
remaining available for future issuance under equity compensation plans (excluding
shares reflected in column)
Equity compensation plans approved by security holders:
 
 
 
 
 
Independent Director Stock Option Plan
29,000

 
$8.87
 
46,000

Equity compensation plans not approved by security holders

 

 

Total:
29,000

 
$8.87
 
46,000

We have adopted an Independent Director Stock Option Plan, as amended, which, subject to certain conditions, provides for the grant to each independent director of an option to purchase 3,000 shares following their becoming a director and for the grant of additional options to purchase 500 shares on the date of each annual stockholder’s meeting. The options for the initial 3,000 shares are exercisable as follows: 1,000 shares on the date of grant and 1,000 shares on each of the first and second anniversaries of the date of grant. All other options are exercisable on the second anniversary of the date of grant. The exercise price for all options is equal to the fair value of our shares, as defined in the plan, on the date of each grant.

Recent Sales of Unregistered Securities
None.


41



Item 6. Selected Financial Data
The following table shows our consolidated selected financial data relating to our consolidated historical financial condition and results of operations. Such selected data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this report (dollar amounts are stated in thousands, except per share amounts).
 
As of and for the year ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
9,662,464

 
$
10,759,884

 
$
10,919,190

 
$
11,391,502

 
$
11,328,211

Debt
$
4,153,099

 
$
6,006,146

 
$
5,902,712

 
$
5,532,057

 
$
5,085,899

Operating Data:
 
 
 
 
 
 
 
 
 
Total income
$
1,321,837

 
$
1,119,023

 
$
920,385

 
$
802,402

 
$
691,322

Total interest and dividend income
$
19,267

 
$
23,386

 
$
22,860

 
$
33,068

 
$
55,161

Net income (loss) attributable to Company
$
244,048

 
$
(69,338
)
 
$
(316,253
)
 
$
(176,431
)
 
$
(397,960
)
Net income (loss) per common share, basic and diluted
$
0.27

 
$
(0.08
)
 
$
(0.37
)
 
$
(0.21
)
 
$
(0.49
)
Common Stock Distributions:
 
 
 
 
 
 
 
 
 
Distributions declared to common stockholders
$
450,104

 
$
440,031

 
$
429,599

 
$
417,885

 
$
405,337

Distributions per weighted average common share
$
0.50

 
$
0.50

 
$
0.50

 
$
0.50

 
$
0.51

Funds from Operations:
 
 
 
 
 
 
 
 
 
Funds from operations (a)
$
459,608

 
$
476,713

 
$
443,460

 
$
321,828

 
$
142,601

Cash Flow Data:
 
 
 
 
 
 
 
 
 
Cash flows provided by operating activities
$
422,813

 
$
456,221

 
$
397,949

 
$
356,660

 
$
369,031

Cash flows provided by (used in) investing activities
$
922,624

 
$
(118,162
)
 
$
(286,896
)
 
$
(380,685
)
 
$
(563,163
)
Cash flows provided by (used in) financing activities
$
(1,246,979
)
 
$
(335,443
)
 
$
(160,597
)
 
$
(208,759
)
 
$
(250,602
)
Other Information:
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding, basic and diluted
899,842,722

 
879,685,949

 
858,637,707

 
835,131,057

 
811,400,035

 
(a)
We consider Funds from Operations, or “FFO” a widely accepted and appropriate measure of performance for a REIT. FFO provides a supplemental measure to compare our performance and operations to other REITs. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts or NAREIT, an industry trade group, has promulgated a standard known as FFO, which it believes reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization and impairment charges on depreciable property and after adjustments for unconsolidated partnerships and joint ventures in which we hold an interest. In calculating FFO, impairment charges of depreciable real estate assets are added back even though the impairment charge may represent a permanent decline in value due to decreased operating performance of the applicable property. Further, because gains and losses from sales of property are excluded from FFO, it is consistent and appropriate that impairments, which are often early recognition of losses on prospective sales of property, also be excluded. If evidence exists that a loss reflected in the investment of an unconsolidated entity is due to the write-down of depreciable real estate assets, these impairment charges are added back to FFO. The methodology is consistent with the concept of excluding impairment charges of depreciable assets or early recognition of losses on sale of depreciable real estate assets held by the Company.

FFO is neither intended to be an alternative to “net income” nor to “cash flows from operating activities” as determined by GAAP as a measure of our capacity to pay distributions. We believe that FFO is a better measure of our properties’ operating performance because FFO excludes non-cash items from GAAP net income. FFO is calculated as follows (in thousands):
 

42



 
 
Year ended December 31,
 
 
2013
 
2012
 
2011
Funds from Operations:
 
 
 
 
 
 
Net income (loss) attributable to Company
$
244,048

 
$
(69,338
)
 
$
(316,253
)
Add:
Depreciation and amortization related to investment properties
383,969

 
438,755

 
439,077

 
Depreciation and amortization related to investment in unconsolidated entities
34,766

 
48,840

 
63,645

 
Provision for asset impairment
248,230

 
37,830

 
24,051

 
Provision for asset impairment included in discontinued operations
4,476

 
45,485

 
139,590

 
Impairment of investment in unconsolidated entities
6,532

 
9,365

 
113,621

 
Impairment reflected in equity in earnings of unconsolidated entities

 
470

 
16,739

 
Gain on sale of property reflected in net income attributed to noncontrolling interest

 
5,439

 

Less:
Gains from property sales and transfer of assets
456,563

 
40,691

 
16,510

 
Net Gains from property sales reflected in equity in earnings of unconsolidated entities, net
2,792

 
2,399

 
11,141

 
Gains (loss) from sales of investment in unconsolidated entities
3,058

 
(2,957
)
 
7,545

 
Noncontrolling interest share of depreciation and amortization related to investment properties

 

 
1,814

 
Funds from operations
$
459,608

 
$
476,713

 
$
443,460

Below is additional information related to certain items that significantly impact the comparability of our Funds from Operations and Net Income (Loss) or significant non-cash items from the periods presented (in thousands):
 
 
Year ended December 31,
 
2013
 
2012
 
2011
Gain on conversion of note receivable to equity interest
$

 
$

 
$
(17,150
)
Payment from note receivable previously impaired

 

 
(2,422
)
Gain on notes receivable
(5,334
)
 

 

Impairment on securities
1,052

 
1,899

 
24,356

Straight-line rental income
(8,147
)
 
(11,010
)
 
(13,841
)
Amortization of above/below market leases
(2,659
)
 
(2,271
)
 
(1,326
)
Amortization of mark to market debt discounts
5,929

 
6,488

 
7,973

(Gain) loss on extinguishment of debt
18,777

 
(9,478
)
 
(10,848
)
Gain on extinguishment of debt reflected in equity in earnings of unconsolidated entities
(5,709
)
 
(2,176
)
 

Acquisition costs
2,987

 
1,644

 
1,680




43


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should” and “could.” Similarly, statements that describe or contain information related to matters such as management’s intent, belief or expectation with respect to the Company’s financial performance, investment strategy and portfolio, cash flows, growth prospects, legal proceedings, acquisitions and dispositions, amount and timing of anticipated future cash distributions, amount and timing of anticipated cash proceeds from previously announced sale transactions, including from the sale of the Company's core net lease assets, and other matters are forward-looking statements. These forward-looking statements are not historical facts but are the intent, belief or current expectations of the Company’s management based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Annual Report on Form 10-K . These factors include, but are not limited to: market and economic volatility experienced by the U.S. economy or real estate industry as a whole, and the local economic conditions in the markets in which the Company’s properties are located; the Company’s ability to refinance maturing debt or to obtain new financing on attractive terms; the Company's ability to satisfy closing conditions required for the consummation of acquisitions and dispositions, including the Company's ability to obtain lender consents and other third party consents and the timing of such consents; the availability of cash flow from operating activities to fund distributions; future increases in interest rates; and actions or failures by the Company’s joint venture partners, including development partners. The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.
The following discussion and analysis relates to the years ended December 31, 2013, 2012 and 2011 and as of December 31, 2013 and 2012. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.
Overview
In 2013, we made significant strides in the execution of our portfolio strategy, focusing our diversified assets in three specific real estate asset classes (retail, lodging and student housing), while maintaining a sustainable distribution rate funded by our operations, distributions from unconsolidated entities, and gain on sale of properties. We disposed of assets we determined to be less strategic and reinvested the capital in real estate assets that we believe will produce attractive current yields and long-term risk-adjusted returns to our stockholders. For our existing portfolio, our property managers for our non-lodging properties actively seek to lease space at favorable rates, control expenses, and maintain strong tenant relationships. We oversee the management of our lodging facilities through active engagement with our third party managers and franchisors to maximize occupancy and daily rates as well as control expenses.
On a consolidated basis, essentially all of our revenues and cash flows from operations for the year ended December 31, 2013 were generated by collecting rental payments from our tenants, room revenues from lodging properties, distributions from unconsolidated entities and dividend income earned from investments in marketable securities. Our largest cash expense relates to the operation of our properties as well as the interest expense on our mortgages. Our property operating expenses include, but are not limited to, real estate taxes, regular repair and maintenance, management fees, utilities and insurance (some of which are recoverable). Our lodging operating expenses include, but are not limited to, rooms, food and beverage, utility, administrative and marketing, payroll, franchise and management fees and repairs and maintenance expenses.
In 2013, we saw total net operating income increase from $513.6 million to $577.9 million for the year ended December 31, 2012 to 2013. The increase of $64.3 million or 12.5% was primarily due to a full year of operations for our lodging and student housing properties we purchased in 2012 and the approximately $1.2 billion of properties purchased in 2013. The remainder of the increase of $10.0 million or 2.2% was driven by our lodging same store properties' operating performance.

In evaluating our financial condition and operating performance, management focuses on the following financial and non-financial indicators, discussed in further detail herein:
Funds from Operations (“FFO”), a supplemental non-GAAP measure to net income determined in accordance with GAAP

44


Cash flow from operations as determined in accordance GAAP
Property net operating income (NOI), which excludes interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest and other investment income from corporate investments
Economic and physical occupancy and rental rates
Leasing activity and lease rollover
Managing operating expenses
Average daily room rate, revenue per available room, and average occupancy to measure our lodging properties
Debt maturities and leverage ratios
Liquidity levels
During 2014, we will continue to execute on our strategy of disposing less strategic assets and deploying the capital into segments we believe have opportunity for higher performance, which are multi-tenant retail, lodging, and student housing. For our non-core properties, we strive to improve individual property performance to increase each property’s value. While we believe we will continue to see overall same store operating performance increases in 2014, we could see significant disposition activity in 2014. This disposition activity could cause us to experience dilution in our operating performance during the period we dispose of properties and prior to reinvestment.
We expect to see increased same store operating performance in our lodging and student housing segments in 2014 as we continue to execute our investment strategy in these segment classes. The lodging industry is expected to have continued positive growth for 2014 and rental growth is projected to continue for the student housing properties in 2014. Our retail portfolio is expected to maintain high occupancy and have manageable lease rollover in the next three years. We believe the retail segment same store income will be consistent with 2013 results. In addition, we expect to see similar or slightly decreased operating performance in our non-core portfolio in 2014.
We believe that our debt maturities over the next five years are manageable and although we believe interest rates will rise in the future, we anticipate low interest rates to continue in 2014. We believe we will be maintain our cash distribution in 2014 and anticipate distributions to be funded by cash flow from operations as well as distributions from unconsolidated entities and gains on sales of properties.

Results of Operations
General
Consolidated Results of Operations
This section describes and compares our results of operations for the years ended December 31, 2013, 2012 and 2011. We generate most of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. Investment properties owned for the entire years ended December 31, 2013 and 2012 and December 31, 2012 and 2011, respectively, are referred to herein as “same store” properties. Unless otherwise noted, all dollar amounts are stated in thousands (except per share amounts, per square foot amounts, revenue per available room and average daily rate).

Comparison of the years ended December 31, 2013, 2012 and 2011
 
Year ended
December 31, 2013
 
Year ended
December 31, 2012
 
Year ended
December 31, 2011
Net income (loss) attributable to Company
$
244,048

 
$
(69,338
)
 
$
(316,253
)
Net income (loss) per common share, basic and diluted
$
0.27

 
$
(0.08
)
 
$
(0.37
)
Our net income increased from the year ended December 31, 2012 to 2013 primarily due to the gains on sales of properties for the year ended December 31, 2013 compared to 2012. A gain on sale of property of $442,577 was included in our income from discontinued operations for the year ended December 31, 2013. This gain was offset by our asset impairments of $247,372 for the same period.

45


Our net loss decreased from the years ended December 31, 2011 to 2012 primarily due to a decrease in one-time impairment charges to unconsolidated entities and to various properties for the year ended December 31, 2012 compared to 2011. Additionally, operating income increase from same store growth as our lodging and multi-family (student housing and apartments) operating performance increased and from a full year of operations for retail and lodging properties acquired in late 2011 and early 2012.
A detailed discussion of our financial performance is outlined below.
Operating Income and Expenses:
 
Year ended
December 31, 
2013
 
Year ended
December 31, 
2012
 
Year ended
December 31, 
2011
 
2013 Increase
(decrease) from 2012
 
2012 Increase
(decrease) from 2011
Income:
 
 
 
 
 
 
 
 
 
Rental income
$
361,678

 
$
347,647

 
$
327,052

 
$
14,031

 
$
20,595

Tenant recovery income
71,207

 
73,214

 
66,655

 
(2,007
)
 
6,559

Other property income
7,202

 
5,714

 
8,838

 
1,488

 
(3,124
)
Lodging income
881,750

 
692,448

 
517,840

 
189,302

 
174,608

Operating Expenses:
 
 
 
 
 
 

 

Lodging operating expenses
$
574,224

 
$
449,397

 
$
330,185

 
$
124,827

 
$
119,212

Property operating expenses
84,107

 
77,694

 
77,691

 
6,413

 
3

Real estate taxes
85,597

 
78,348

 
68,255

 
7,249

 
10,093

Provision for asset impairment
242,896

 
37,830

 
24,051

 
205,066

 
13,779

General and administrative expenses
55,549

 
36,815

 
31,026

 
18,734

 
5,789

Business management fee
37,962

 
39,892

 
40,000

 
(1,930
)
 
(108
)
Property Income and Operating Expenses
Rental income for non-lodging properties consists of basic monthly rent, straight-line rent adjustments, amortization of acquired above and below market leases, other property, and percentage rental income recorded pursuant to tenant leases. Tenant recovery income consists of reimbursements for real estate taxes, common area maintenance costs, management fees, and insurance costs. Tenant recovery income generally fluctuates correspondingly with property operating expenses and real estate taxes. Other property income for non-lodging properties consists of lease termination fees and other miscellaneous property income. Property operating expenses for non-lodging properties consist of regular repair and maintenance, management fees, utilities and insurance (some of which are recoverable from the tenant).
There was a slight increase in property income for the year ended December 31, 2013 compared to 2012. The increase was a result of the full year of operations for the properties acquired in 2012 as well as the operating performance of the properties acquired in 2013. Same store property performance remained stable. Same store property income amounted to $386,588 in 2013 and $387,289 in 2012, which resulted in a 0.2% decrease. Comparatively, same store operating expenses were $143,585 in 2013 and $142,235 in 2012, an increase of 0.9%.
There was a slight increase in property income for the year ended December 31, 2012 compared to 2011. The increase was a result of the full year of operations for the properties acquired in 2011 as well as the operating performance of the properties acquired in 2012. Same store property performance remained stable. Same store property income amounted to $372,328 in 2012 compared to $371,359 in 2011, which was less than a 1% increase. In correlation, same store property operating expenses amounted to $135,067 in 2012 compared to $133,506 in 2011, which was a 1.2% increase.

Lodging Income and Operating Expenses
Our lodging properties generate revenue through sales of rooms and associated food and beverage services. Lodging operating expenses include the room maintenance, food and beverage, utilities, administrative and marketing, payroll, franchise and management fees, and repairs and maintenance expenses.
The $189,302 increase in lodging operating income for the year ended December 31, 2013 compared to 2012 was primarily a result of the addition of hotels acquired in 2012 and 2013, which were mostly in the upper-upscale or

46


luxury classification, We acquired fourteen hotels in 2013 and seven hotels in 2012. Additionally, $24,035 of the increase was due to improved same store performance as a result of higher rental rates. Same store average daily rates increased from $131 in 2012 to $136 in 2013. The addition of these upper-upscale and luxury properties to our portfolio resulted in higher operating costs. The increase in lodging expenses of $124,827, or 28%, for 2013 was directly correlated to the percentage increase in income of 27%.
The $174,608 increase in lodging operating income for the year ended December 31, 2012 compared to 2011 was a result of the addition of hotels acquired in 2012 as well as an increase in our same store properties' performance. We acquired five hotels in the first quarter of 2012 and were able to obtain nine months of operating performance. The remaining $26,303 of the increase was due to improved same store performance as a result of higher rental rates. Same store average daily rates increased from $125 in 2011 to $129 in 2012. The increase in lodging expenses of $119,212, or 36%, for 2012 was directly correlated to the percentage increase in income of 34%.
Provision for Asset Impairment
For the year ended December 31, 2013, we identified certain properties which may have a reduction in the expected holding period and reviewed the probability of these assets’ dispositions. As part of our analysis, we identified one property, a large single tenant office property, in which we were exploring a potential disposition. After we began exploring a potential sale of the property, we became aware of circumstances in which the tenant would reduce the space they occupied. Although the lease does not expire until 2016, we analyzed various leasing and sale scenarios for the single tenant property. Based on the probabilities assigned to such scenarios, it was determined the property was impaired and therefore, written down to fair value. As a result, we recorded a provision for asset impairment of $147,480 during the second quarter 2013. Overall, we recorded a provision for asset impairment of $248,230 for continuing operations and $4,476 for discontinued operations, to reduce the book value of certain investment properties to their fair values. Offsetting the impairment charges, due to a change in the amount of an impaired note's expected future cash flows, we reduced the note's impairment allowance, resulting in a gain of $5,334.
For the years ended December 31, 2012 and 2011, we identified certain properties which may have a reduction in the expected holding period and reviewed the probability of these assets’ dispositions. As a result, we recorded a provision for asset impairment of $37,830 and $24,051 in continuing operations, respectively, to reduce the book value of certain investment properties to their new fair values. We disposed of many of the properties impaired in 2012 and 2011 by December 31, 2013. The related impairment charges of $45,485 and $139,590, respectively, are reflected in discontinued operations.
General Administrative Expenses and Business Management Fee
After our stockholders have received a non-cumulative, non-compounded return of 5% per annum on their “invested capital,” we pay our business manager an annual business management fee of up to 1% of the “average invested assets,” payable quarterly in an amount equal to 0.25% of the average invested assets as of the last day of the immediately preceding quarter. Once we have satisfied the minimum return on invested capital, the amount of the actual fee paid to the business manager is requested by the business manager and approved by the board of directors up to the amount permitted by the agreement.
We incurred a business management fee of $37,962, $39,892 and $40,000, which is equal to 0.37%, 0.35%, and 0.35% of average invested assets for the years ended December 31, 2013, 2012 and 2011, respectively.
The increase in general and administrative expenses of $18,734 from $36,815 to $55,549 for the years ended December 31, 2012 to 2013, respectively, was primarily a result of increased legal costs, increased consulting and professional fees due to our large amount of transaction activity and the execution of our portfolio strategy, as well as increased salary expenses resulting from additional personnel, which is reimbursed to the business manager.
The increase in general and administrative expenses of $5,789 from $31,026 to $36,815 for the years ended December 13, 2012 and 2011, respectively, was primarily a result of increased legal costs and increased salary expenses as a result of a shift in personnel from our property managers to our business manager.


47


Non-Operating Income and Expenses:
 
Year ended
December 31, 
2013
 
Year ended
December 31, 
2012
 
Year ended
December 31, 
2011
 
2013 Increase
(decrease) 
from 2012
 
2012 Increase
(decrease) 
from 2011
Non-operating income and expenses:
 
 
 
 
 
 
 
 
 
Other income
$
15,335

 
$
2,010

 
$
19,694

 
$
13,325

 
$
(17,684
)
Interest expense
(212,263
)
 
(209,353
)
 
(215,790
)
 
2,910

 
(6,437
)
Equity in income (loss) of unconsolidated entities
11,958

 
1,998

 
(12,802
)
 
9,960

 
14,800

Gain, (loss) and (impairment) of investment in unconsolidated entities, net
(3,473
)
 
(12,322
)
 
(106,023
)
 
(8,849
)
 
93,701

Realized gain, (loss) and (impairment) on securities, net
31,539

 
4,319

 
(16,219
)
 
27,220

 
20,538

Income (loss) from discontinued operations, net
459,588

 
46,780

 
(42,256
)
 
412,808

 
89,036

Other Income
The increase in other income for the year ended December 31, 2013 compared to 2012 was primarily a result of the gain recognized on fourteen multi-tenant retail properties contributed to the IAGM Retail Fund I, LLC joint venture. We have an equity interest in the IAGM Retail Fund I, LLC joint venture; therefore we have a continued ownership interest in the properties. As such, we treated this disposition as a partial sale, recognizing a gain on sale of $12,783 for the year ended December 31, 2013, and the activity related to the contributed properties remain in continuing operations on the consolidated statements of operations and other comprehensive income.
The decrease in other income for the year ended December 31, 2012 compared to 2011 was primarily due to the gain recognized on the conversion of a note receivable to equity of $17,150 in an unconsolidated entity for the year ended December 31, 2011.
Interest Expense
Interest expense from continuing operations remained largely unchanged for the year ended December 31, 2013 compared to 2012 with balances of $212,263 and $209,353, respectively. However, additional interest expense of $72,906 and $111,281 was reflected in discontinued operations for the years ended December 31, 2013 and 2012, respectively. In total interest expense decreased for the year ended December 31, 2013 compared to 2012 with balances of $285,169 and $320,634, respectively. This was primarily due to the decrease in the principal amount of our total debt (including mortgages, line of credit, and mortgages held for sale) as of December 31, 2013 compared to 2012 with balances of $4,920,180 and $5,867,004, respectively.
Interest expense from continuing operations decreased for the year ended December 31, 2012 compared to 2011 with balances of $209,353 and $215,790, respectively. However, additional interest expense of $111,281 and $101,682 was reflected in discontinued operations for the years ended December 31, 2012 and 2011, respectively. In total interest expense increased for the year ended December 31, 2012 compared to 2011 with balances of $320,634 and $317,472, respectively. This was primarily due to the increase in the principal amount of our total debt as of December 31, 2012 compared to 2011 with balances of $5,867,004 to $5,781,855.
Our weighted average interest rate on total outstanding debt was 4.95%, 5.10%, and 5.20% per annum for the years ended December 31, 2013, 2012 and 2011, respectively.

Equity in Income (Loss) of Unconsolidated Entities
Our equity in income of unconsolidated entities includes the income we pick up from each joint venture's operating income or loss. Also included in this figure are any one-time adjustments associated with the transactions of the joint venture.
For the year ended December 31, 2013, the equity in income of unconsolidated entities in 2013 was primarily a result of a gain on the property sales of $3,015 in one unconsolidated entity and a gain on the extinguishment of debt of $5,709 in an unconsolidated entity.

48


For the year ended December 31, 2012, the equity in income of unconsolidated entities in 2012 was largely a result of a $4,575 gain from our share of property sales and extinguishment of debt in two unconsolidated entities offset by an impairment charge recognized by one unconsolidated entity of which our portion was $470.
For the year ended December 31, 2011, the equity in loss of unconsolidated entities was largely a result of impairment charges recognized by two unconsolidated entities of which our portion was $16,739, offset by a $11,141 gain from our share of property sales in two unconsolidated entities.
Gain, (Loss) and (Impairment) of Investment in Unconsolidated Entities, net
For the year ended December 31, 2013, we recorded an impairment of $6,532 in two unconsolidated joint ventures. We also recorded a net gain of $3,058 on sales of four unconsolidated entities.
For the year ended December 31, 2012, we recorded an impairment of $9,365 on three of our investments in unconsolidated entities. Additionally, we recorded losses on the sales of 100% of our equity in one joint venture of $1,556 and a lodging joint venture of $1,401.
For the year ended December 31, 2011, we recorded an impairment of $113,621 on an investment in an unconsolidated entity. The impairment was offset by a $7,545 gain on our investment in unconsolidated entities due to the sale of 100% of our equity in one joint venture.
Realized Gain, (Loss) and (Impairment) on Securities, net
For the year ended December 31, 2013, there was a $1,052 impairment charge for equity securities offset by a $32,591 net realized gain.
For the year ended December 31, 2012, there was a $1,899 impairment charge for equity securities offset by a $6,218 net realized gain.
For the year ended December 31, 2011, the loss was primarily due to a $24,356 impairment charge for equity securities offset by an $8,137 realized gain.
Discontinued Operations
For the year ended December 31, 2013 we recorded income of $459,588 from discontinued operations, which primarily included a gain on sale of properties of $442,577, a gain on extinguishment of debt of $18,285, a gain on transfer of assets of $16, and provision for asset impairment of $4,476.
For the year ended December 31, 2012, we recorded income of $46,780 from discontinued operations, which primarily included a gain on sale of properties of $39,236, a gain on extinguishment of debt of $9,478, a gain on transfer of assets of $2,175, and provision for asset impairment of $45,485.
For the year ended December 31, 2011, we recorded a loss of $42,256 from discontinued operations, which primarily included a gain on sale of properties of $11,457, a gain on extinguishment of debt of $10,848, a gain on transfer of assets of $4,546 and a provision for asset impairment of $139,590.

Segment Reporting

Our long-term portfolio strategy is to focus on three asset classes - retail, lodging, and student housing. During the year ended December 31, 2013, we executed on this strategy by disposing of 313 non-strategic assets as well as classifying 224 non-strategic assets as held for sale.  Therefore, beginning on September 30, 2013, we restated our business segments to: Retail, Lodging, Student Housing, and Non-core.  Net operating income for the years ended December 31, 2012 and 2011 have been restated to reflect the change in business segments. The non-core segment includes office properties, industrial properties, bank branches, retail single tenant properties, and a conventional multi-family property. We have concentrated our efforts on driving portfolio growth in the multi-tenant retail, student housing and lodging segments to enhance the long-term value of each segment's portfolio and respective platforms. For our non-core properties, we strive to improve individual property performance to increase each property’s value. We evaluate segment performance primarily based on net operating income. Net operating income of the segments exclude interest expense, depreciation and amortization, general and administrative expenses, net income of noncontrolling interest and other investment income from corporate investments.
An analysis of results of operations by segment is below. In order to evaluate our overall portfolio, management analyzes the operating performance of all properties from period to period and properties we have owned and operated for the same period during each year. A total of 232 and 226 of our investment properties satisfied the criteria of being owned for the entire years ended December 31, 2013 and 2012 and December 31, 2012 and 2011, respectively, and are referred to herein as “same store” properties. This same store analysis allows management to monitor the operations of our existing properties for comparable

49


periods to determine the effects of our new acquisitions on net income. The tables contained throughout summarize certain key operating performance measures for the years ended December 31, 2013, 2012 and 2011. The rental rates reflected in retail, student housing and non-core are inclusive of rent abatements, lease inducements and straight-line rent GAAP adjustments, but exclusive of tenant improvements and lease commissions. Physical occupancy is defined as the percentage of total gross leasable area actually used or occupied by a tenant. Economic occupancy is defined as the percentage of total gross leasable area for which a tenant is obligated to pay rent under the terms of its lease agreement, regardless of the actual use or occupation by that tenant of the area being leased.

Retail Segment
Our retail segment now consists solely of multi-tenant retail properties in order to present information consistent with our long-term portfolio investment strategy. Our retail segment net operating income on a same store basis remained stable for the year ended December 31, 2013 compared to the year ended December 31, 2012, slightly down $856 or 0.5%. On a total segment basis, we saw a decrease in total net operating income of $8,950 or 4.4%. This was primarily a result of the 14 properties we contributed to the IAGM Retail Fund I, LLC joint venture. For the year ended December 31, 2012, a full year of operations was included in net operating income, whereas for the year ended December 31, 2013, only operations through the disposition date in early April 2013 are included in net operating income.
Our retail segment net operating income on a same store basis grew slightly for the year ended December 31, 2012 compared to the year ended December 31, 2011, up $1,973 or 1.2%. This was a result of stable same store economic occupancy and comparable lease rates year to year. On a total segment basis, we saw an increase in total net operating income of $14,679 or 7.7%. This was due to a full year of operations for our acquisitions in 2011 as well as property operating performance for our 2012 acquisitions.
We believe that fundamentals in the retail segment are slowly improving. Current market outlook indicates well-timed acquisitions as well as divestiture of low-quality assets are essential to sustainable growth. Sustainable growth is also supported by the strong demand for grocery-anchored retail centers, which are part of our retail acquisition strategy due to their resiliency to e-commerce. With limited new development and construction, we have a positive view of this segment long-term. Our retail portfolio strategy is to focus our capital in favorable demographic and geographic locations where rental and net operating income growth is expected. For current properties in the portfolio, we continue to maintain our expense controls and our successful property marketing programs and enhance current tenant relationships. We focus on new consumer trends and reevaluate tenant synergy as leases mature in an effort to guarantee proper tenant diversity at our properties.

 
Total Retail Properties
 
As of December 31,
 
2013
 
2012
 
2011
Physical occupancy
90%
 
91%
 
91%
Economic occupancy
91%
 
92%
 
93%
Rent per square foot
$13.57
 
$13.30
 
$13.21
Investment in properties, undepreciated
$2,641,706
 
$3,076,434
 
$3,014,731


50


Comparison of Years Ended December 31, 2013 and 2012
The table below represents operating information for the retail segment and for the same store retail segment consisting of properties acquired prior to January 1, 2012. The properties in the same store portfolio were owned for the entire years ended December 31, 2013 and 2012. Activity in the non-same store column for the years ended December 31, 2013 and 2012 includes those properties contributed to the IAGM joint venture.
 
Retail
For the year ended
December 31, 2013
 
For the year ended
December 31, 2012
 
Same Store Change
Favorable/
(Unfavorable)
 
Total Change
Favorable/
(Unfavorable)
 
Same Store
Non Same Store
Total
 
Same Store
Non Same Store
Total
 
Amount
%
 
Amount
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
$199,711
$15,423
$215,134
 
$200,698
$25,848
$226,546
 
$(987)
(0.5
)%
 
$(11,412)
(5.0
)%
Straight line adjustment
4,041

1,157

5,198

 
3,904

920

4,824

 
137

3.5
 %
 
374

7.8
 %
Tenant recovery income
59,276

5,654

64,930

 
58,632

7,522

66,154

 
644

1.1
 %
 
(1,224
)
(1.9
)%
Other property income
3,592

230

3,822

 
2,979

(293
)
2,686

 
613

20.6
 %
 
1,136

42.3
 %
Total income
266,620

22,464

289,084

 
266,213

33,997

300,210

 
407

0.2
 %
 
(11,126
)
(3.7
)%
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
50,313

3,818

54,131

 
50,901

5,706

56,607

 
588

1.2
 %
 
2,476

4.4
 %
Real estate taxes
36,505

2,990

39,495

 
34,654

4,541

39,195

 
(1,851
)
(5.3
)%
 
(300
)
(0.8
)%
Total operating expenses
86,818

6,808

93,626

 
85,555

10,247

95,802

 
(1,263
)
(1.5
)%
 
2,176

2.3
 %
Net operating income
$179,802
$15,656
$195,458
 
$180,658
$23,750
$204,408
 
$(856)
(0.5
)%
 
$(8,950)
(4.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average occupancy for the period
91%
-
91%
 
92%
-
92%
 
 
 
 
 
 
Number of Properties
113
6
119
 
113
2
115
 
 
 
 
 
 



51


Comparison of Years Ended December 31, 2012 and 2011
The table below represents operating information for the retail segment and for the same store retail segment consisting of properties acquired prior to January 1, 2011. The properties in the same store portfolio were owned for the entire years ended December 31, 2012 and 2011. Activity in the non-same store column for the years ended December 31, 2012 and 2011 includes those properties contributed to the IAGM joint venture.
Retail
For the year ended
December 31, 2012
 
For the year ended
December 31, 2011
 
Same Store Change
Favorable/
(Unfavorable)
 
Total Change
Favorable/
(Unfavorable)
  
Same Store
Non Same Store
Total
 
Same Store
Non Same Store
Total
 
Amount
%
 
Amount
%
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
$188,996
$37,550
$226,546
 
$188,519
$22,517
$211,036
 
$477
0.3
 %
 
$15,510
7.3
 %
Straight line adjustment
4,114

710

4,824

 
4,933

9

4,942

 
(819
)
(16.6
)%
 
(118
)
(2.4
)%
Tenant recovery income
56,316

9,838

66,154

 
53,732

7,037

60,769

 
2,584

4.8
 %
 
5,385

8.9
 %
Other property income
2,972

(286
)
2,686

 
3,599

1,066

4,665

 
(627
)
(17.4
)%
 
(1,979
)
(42.4
)%
Total income
252,398

47,812

300,210

 
250,783

30,629

281,412

 
1,615

0.6
 %
 
18,798

6.7
 %
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
48,887

7,720

56,607

 
49,794

5,359

55,153

 
907

1.8
 %
 
(1,454
)
(2.6