INVESTMENT IN HOTEL PROPERTIES, NET

Investment in Hotel Properties, net

Investment in hotel properties, net at September 30, 2016 and December 31, 2015 is as follows (in thousands):



	September 30, 2016			December 31, 2015
Land	$	173,028		$	149,996
Hotel buildings and improvements	1,363,232			1,222,017
Construction in progress	17,926			6,555
Furniture, fixtures and equipment	126,287			123,332
	1,680,473			1,501,900
Less accumulated depreciation	(209,724		)	(168,493		)
	$	1,470,749		$	1,333,407

Assets Held for Sale

Assets held for sale at September 30, 2016 and December 31, 2015 include the following (in thousands):



	September 30, 2016		December 31, 2015
Land	$	10,907	$	24,250
Hotel buildings and improvements	44,683		97,249
Furniture, fixtures and equipment	6,628		10,906
Franchise fees and other	395		733
	$	62,613	$	133,138

On June 2, 2015, the Operating Partnership and certain affiliated entities entered into two separate agreements, as amended on July 15, 2015 (collectively, the "ARCH Agreements"), to sell a portfolio of 26 hotels containing an aggregate of 2,793 guestrooms to affiliates of American Realty Capital Hospitality Trust, Inc. ("ARCH") for an aggregate cash purchase price of approximately $347.4 million. As a result of the ARCH Agreements, we classified the hotel properties to be sold pursuant to the ARCH Agreements as Assets Held for Sale. The hotels were to be sold in three separate closings. The first closing of 10 hotels containing 1,090 guestrooms was completed on October 15, 2015 for an aggregate cash payment of $150.1 million and was executed through forward and reverse 1031 Exchanges to defer taxable gains on the sale of the hotels.

On December 29, 2015, we and ARCH agreed to terminate the ARCH Agreement with respect to ARCH’s right to acquire fee simple interests in 10 hotels containing a total of 996 guestrooms for an aggregate purchase price of $89.1 million at a closing that had been scheduled to occur on December 29, 2015 (the “Terminated Purchase Agreement”). As a result of the termination, ARCH forfeited and we retained the $9.1 million earnest money deposit made by ARCH under the ARCH Agreements and the parties were released from further obligations, except those which expressly survive the termination of the ARCH Agreement pursuant to its terms.

On February 11, 2016, we completed the sale of six hotels to ARCH for an aggregate purchase price of $108.3 million. We provided seller-financing (as described below) to ARCH of $20.0 million to consummate the transaction. The proceeds from the sale were used to complete certain reverse 1031 Exchanges. The hotels acquired by us to complete the reverse 1031 Exchanges included the 179-guestroom Courtyard by Marriott in Atlanta (Decatur), GA on October 20, 2015 for a purchase price of $44.0 million and the 226-guestroom Courtyard by Marriott in the West End of Nashville, TN on January 19, 2016 for a purchase price of $71.0 million. The completion of the reverse 1031 Exchanges resulted in the deferral of taxable gains for tax purposes of approximately $74.0 million and the pay-down of our unsecured revolving credit facility by $105.0 million. Additionally, we repaid a mortgage loan totaling $5.8 million related to the assets sold to ARCH. The sale to ARCH resulted in a $56.8 million gain, of which $20.0 million was initially deferred related to the seller financing. Through September 30, 2016, we have recognized as income $5.0 million of the deferred gain upon receipt of scheduled repayments of the principal balance of the loan from ARCH.

On February 11, 2016, the Company and American Realty Capital Hospitality Portfolio SMT ALT, LLC, an affiliate of ARCH, as substitute purchaser (“New ARCH Purchaser”), entered into a letter agreement (the “Reinstatement Agreement”) and agreed, subject to the terms and conditions of the Reinstatement Agreement, to reinstate the Terminated Purchase Agreement in its entirety, except as modified by the Reinstatement Agreement (the Terminated Purchase Agreement, as reinstated and modified by the Reinstatement Agreement, is referred to herein as the “Reinstated Purchase Agreement”), to make null and void the prior termination of the Terminated Purchase Agreement and to proceed with the proposed sale of the 10 hotels (the “Reinstated Hotels”) pursuant to the Reinstated Purchase Agreement for an aggregate purchase price of $89.1 million. The Reinstated Hotels are being sold to the New ARCH Purchaser as part of the ARCH Sale.

The Reinstatement Agreement required the New ARCH Purchaser to deposit non-refundable earnest money in the amount of $7.5 million (the “New Deposit”) with an escrow agent to support the closing of the Reinstated Hotels. The New Deposit is non-refundable to the New ARCH Purchaser except in limited circumstances. The prior earnest money deposit in the amount of $9.1 million that was retained by us in connection with the termination of the Terminated Purchase Agreement will not be credited to the New ARCH Purchaser against the purchase price for the Reinstated Hotels, and the purchase price remains the same. The closing of the sale of the Reinstated Hotels is scheduled to occur on or before December 30, 2016 (the “New Closing Date”), or at such later date as the closing may be adjourned or extended in accordance with the express terms of the Reinstatement Agreement. If the closing of the Reinstated Hotels does not occur as required by the Reinstatement Agreement, then the New ARCH Purchaser will forfeit the New Deposit to us as liquidated damages.

Prior to the New Closing Date, we have the right to continue to market and ultimately sell, without the consent of the New ARCH Purchaser, any or all of the Reinstated Hotels to bona fide third-party purchasers that are not affiliates of ours. If we sell some, but not all of the Reinstated Hotels to bona fide third-party purchasers, then the purchase price to be paid by the New ARCH Purchaser for the remaining Reinstated Hotels will be reduced, but the New Deposit will remain with the escrow agent except in limited circumstances. We are actively marketing the Reinstated Hotels to other potential buyers and if the closing of the Reinstated Hotels does not occur as required by the Reinstatement Agreement, we will continue to market the Reinstated Hotels to other potential buyers. During the nine months ended September 30, 2016, we completed the sale of two of the Reinstated Hotels to purchasers that are unrelated to the New ARCH Purchaser. Accordingly, the $89.1 million selling price of the Reinstated Hotels will be reduced as provided above.

On February 11, 2016, the Operating Partnership entered into a loan agreement with ARCH, as borrower, which provides for a loan by the Operating Partnership to ARCH in the amount of $27.5 million (the “Loan”). The proceeds of the Loan were required to be applied by ARCH as follows: (i) $20.0 million was applied toward the payment of a portion of the $108.3 million purchase price for the six hotels containing 707 guestrooms, which were acquired by ARCH on February 11, 2016 as part of the ARCH Sale; and (ii) the remaining $7.5 million was applied by ARCH to fund the New Deposit under the Reinstated Purchase Agreement. The Loan is recorded net of deferred gains in Investment in Real Estate Loans, net on our Condensed Consolidated Balance Sheet at September 30, 2016.

The entire principal amount of the Loan, and any accrued and unpaid interest, will be due and payable on February 11, 2017 (the “Maturity Date”), unless extended pursuant to the Loan agreement. During the nine months ended September 30, 2016, ARCH made scheduled principal payments of $5.0 million (“Amortization Payments”). The Loan may be prepaid in whole or in part at any time by ARCH, without payment of any penalty or premium. ARCH may extend the maturity date of the Loan under certain conditions by up to two years pursuant to two one-year extension options (each an “Extension Option”).

Interest will accrue on the unpaid principal balance of the Loan at a rate of 13.0% per annum from the date of the Loan to the initial Maturity Date, 14.0% per annum during the first extension period and 15.0% per annum during the second extension period. An amount equal to 9.0% per annum is to be paid monthly (the "Monthly Interest"). The remaining 4.0%, 5.0% and 6.0%, as the case may be, will accrue and be compounded monthly (the “PIK”). The PIK must be paid to exercise any Extension Option, otherwise the PIK is payable at the initial Maturity Date. The PIK may be paid in cash prior to the initial Maturity Date, or any extension thereof. We will recognize the PIK as payments are received from ARCH. ARCH is current with respect to the payment of the Amortization Payments and Monthly Interest.

In addition to the hotel properties related to the ARCH Agreements noted above, Assets Held for Sale at December 31, 2015 included land parcels in Spokane, WA, Fort Myers, FL and Flagstaff, AZ, which were being actively marketed for sale. Subsequent to December 31, 2015, the land in Fort Myers, FL has been reclassified from Assets Held for Sale to Investment in Hotel Properties, net as during the nine months ended September 30, 2016 we decided that we would not sell the land parcel separately from the adjacent hotel property.

Other Dispositions

On May 13, 2016, we completed the sale of the Holiday Inn Express & Suites in Irving (Las Colinas), TX for $10.5 million. On June 1, 2016, we completed the sale of the Aloft in Jacksonville, FL for $8.6 million. On June 7, 2016, we completed the sale of the Holiday Inn Express in Vernon Hills, IL for $5.9 million. The proceeds from the sale of these properties were used to complete certain reverse 1031 Exchanges. The hotel acquired by us to complete the reverse 1031 Exchange was the 160-guestroom Residence Inn by Marriott in Atlanta, GA on January 20, 2016 for a purchase price of $38.0 million. The completion of the reverse 1031 Exchange resulted in the deferral of taxable gains of approximately $5.1 million.

At December 31, 2015, we held two notes receivable totaling $2.7 million included in Investment in Real Estate Loans, net on our Condensed Consolidated Balance Sheet related to seller-financing for the sale in a prior year of two hotel properties in Emporia, KS (each an "Emporia Property"). The loans had matured and the buyer was in payment default under the terms of the loans. We were awarded legal title to one Emporia Property through foreclosure. We also purchased an additional note receivable from the first priority lien holder for the Emporia Property for which foreclosure proceedings were ongoing to facilitate the completion of the reacquisition of this Emporia Property through a foreclosure.

On April 15, 2016, we completed the sale of the reacquired Emporia Property to a third party purchaser that was unrelated to the prior owner. On May 18, 2016, we completed the sale of the first and second lien notes related to the remaining Emporia Property to the same purchaser. The aggregate selling price of the Emporia assets was approximately $4.5 million. As a result of the foreclosure activities and the sale of the notes, we have no further interest in either Emporia Property.

On July 6, 2016, we completed the sale of the Hyatt Place in Irving (Las Colinas), TX for $14.0 million. The proceeds from the sale of this property will be used to complete certain 1031 Exchanges.

The sale of these four properties during the nine months ended September 30, 2016 resulted in the realization of a net gain of $8.1 million.

Loss on Impairment of Assets

At September 30, 2016, we were under contract to sell the Courtyard by Marriott in El Paso, TX for $11.0 million. We recorded a loss on impairment of assets of $0.6 million related to this transaction during the three months ended September 30, 2016. This hotel is one of the eight remaining Reinstated Hotels and is being sold to a third party that is unrelated to ARCH.

During the three months ended September 30, 2015, we determined that the value of land parcels in San Antonio, TX, Fort Myers, FL and Flagstaff, AZ were impaired based on market conditions. As such, we recognized a loss on impairment of assets of $1.1 million in our Condensed Consolidated Statement of Operations during the three months ended September 30, 2015.

Hotel Property Acquisitions

On August 9, 2016, we completed the purchase of the 157-guestroom Marriott in Boulder, CO for $61.4 million. Legal title was temporarily held by a qualified intermediary (the "QI") engaged to execute a 1031 Exchange and title to the property was transferred to us in October 2016. We retain essentially all of the legal and economic benefits and obligations related to the property. As such, the carrying amount and operating results of the hotel are included in our condensed consolidated financial statements as a VIE until legal title was transferred to us in October 2016.

A summary of the hotel properties acquired during the nine months ended September 30, 2016 and 2015 is as follows (in thousands):



Date Acquired	Franchise/Brand	Location	Purchase Price
For the nine months ended September 30, 2016
January 19, 2016	Courtyard by Marriott	Nashville, TN	$	71,000
January 20, 2016	Residence Inn by Marriott	Atlanta, GA	38,000
August 9, 2016	Marriott	Boulder, CO	61,400
			$	170,400	(1)
For the nine months ended September 30, 2015
April 13, 2015	Hampton Inn & Suites	Minneapolis, MN	$	38,951
June 18, 2015	Hampton Inn	Boston (Norwood), MA	24,000
June 30, 2015	Hotel Indigo	Asheville, NC	35,000
July 24, 2015	Residence Inn by Marriott	Branchburg, NJ	25,700
July 24, 2015	Residence Inn by Marriott	Hunt Valley, MD	31,100
			$	154,751	(2)

(1) The net assets acquired totaled $169.7 million due to the assumption at settlement of $0.7 million of net liabilities.


(2)	The net assets acquired totaled $155.1 million due to the purchase at settlement of $0.3 million of net working capital assets.

The hotel properties were acquired in 2016 using the net proceeds from our Series D cumulative redeemable preferred stock offering (See "Note 6 - Equity"), advances on our senior unsecured credit facility (See "Note 4 - Debt"), cash generated by the sale of properties and operating cash flows. The hotel properties were acquired in 2015 using advances on our senior unsecured credit facility, cash generated by the sale of properties and operating cash flows.

The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):



	For the Nine Months Ended September 30,
	2016				2015
Land	$	23,288			$	9,975
Hotel buildings and improvements	143,856				134,109
Furniture, fixtures and equipment	2,948				13,690
Other assets	946			(1)	700			(2)
Total assets acquired	171,038				158,474
Less - lease liability assumed	—				(3,250		)
Less - other liabilities assumed	(1,384		)	(1)	(160		)	(2)
Net assets acquired	$	169,654			$	155,064

(1) The net assets acquired totaled $169.7 million due to the assumption at settlement of $0.7 million of net liabilities.


(2)	The net assets acquired totaled $155.1 million due to the purchase at settlement of $0.3 million of net working capital assets.

Total revenues and net income for hotel properties acquired in the nine months ended September 30, 2016 and 2015, which are included in our Condensed Consolidated Statements of Operations, are as follows (in thousands):



	2016 Acquisitions		2015 Acquisitions				2016 Acquisitions		2015 Acquisitions
	For the		For the				For the		For the
	Three Months Ended September 30,		Three Months Ended September 30,				Nine Months Ended September 30,		Nine Months Ended September 30,
	2016		2016		2015		2016		2016		2015
Revenues	$	8,071	$	10,075	$	8,936	$	18,582	$	25,575	$	10,848
Net income	$	2,568	$	2,357	$	1,636	$	5,284	$	2,450	$	1,826

The results of operations of acquired hotel properties are included in the Condensed Consolidated Statements of Operations beginning on their respective acquisition dates. The following unaudited condensed pro forma financial information presents the results of operations as if all acquisitions in 2016 and 2015 had taken place on January 1, 2015 and all dispositions had occurred prior to that date. Additionally, the unaudited condensed pro forma information excludes the operating results from discontinued operations and disposed properties that were not classified as discontinued operations after the adoption of ASU No. 2014-08 on January 1, 2015. The unaudited condensed pro forma financial information is for comparative purposes only and is not necessarily indicative of what actual results of operations would have been had the hotel acquisitions and dispositions taken place on or before January 1, 2015. The pro forma amounts exclude the $10.5 million and $50.0 million gain on the sale of hotel properties during the three and nine months ended September 30, 2016, respectively. This information does not purport to be indicative of or represent results of operations for future periods.

The unaudited condensed pro forma financial information for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands, except per share):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2016 (1)		2015		2016 (1)		2015
	(unaudited)				(unaudited)
Revenues	$	119,861	$	117,621	$	363,148	$	345,891
Income from hotel operations	$	45,401	$	44,336	$	140,232	$	130,532
Net income before taxes	$	16,227	$	10,604	$	51,091	$	42,872
Net income	$	17,472	$	10,420	$	50,630	$	41,286
Net income attributable to common stockholders, net of amount allocated to participating securities	$	12,367	$	6,200	$	37,016	$	28,529
Basic net income per share attributable to common stockholders	$	0.14	$	0.07	$	0.43	$	0.33
Diluted net income per share attributable to common stockholders	$	0.14	$	0.07	$	0.42	$	0.33

(1) The pro forma amounts exclude the $10.5 million and $50.0 million gain on the sale of hotel properties during the three and nine months ended September 30, 2016, respectively.