INVESTMENT IN HOTEL PROPERTIES, NET

Investment in Hotel Properties, net

Investment in hotel properties, net at June 30, 2017 and December 31, 2016 is as follows (in thousands):



	June 30, 2017			December 31, 2016
Land	$	235,929		$	178,423
Hotel buildings and improvements	1,681,609			1,433,389
Intangible assets	22,312			6,602
Construction in progress	14,118			22,490
Furniture, fixtures and equipment	152,795			129,437
	2,106,763			1,770,341
Less - accumulated depreciation and amortization	(249,215		)	(225,219		)
	$	1,857,548		$	1,545,122

Intangible assets included in Investment in hotel properties, net and intangible liabilities included in Accrued expenses and other in our Condensed Consolidated Balance Sheets include the following (in thousands):



	June 30, 2017			December 31, 2016
Intangible assets:
Air rights ⁽¹⁾	$	11,213		$	—
Favorable leases ⁽²⁾	10,053			6,032
In-place lease agreements	966			570
Other	80			—
	22,312			6,602
Less accumulated amortization	(590		)	(348		)
Intangible assets, net	$	21,722		$	6,254

Intangible liabilities:
Unfavorable leases ⁽²⁾	$	5,002		$	5,002
Less accumulated amortization	(237		)	(190		)
Intangible liabilities, net	$	4,765		$	4,812


(1)	In conjunction with the acquisition of the Courtyard by Marriott - Charlotte, NC, the Company acquired the air rights associated with the hotel property.

(2)

Intangible assets and liabilities are recorded on contracts assumed as part of the acquisition of certain hotels. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts assumed and our estimate of the fair market contract rates for corresponding contracts measured over a period equal to the remaining non-cancelable term of the contracts assumed. Intangible assets and liabilities are amortized over the remaining non-cancelable term of the related contracts.

Investment in Hotel Properties Under Development

We are developing a hotel in Orlando, FL on a parcel of land owned by us. We expect the total development costs for the construction of the hotel to be approximately $30.0 million. We have incurred $9.9 million of costs to date and we have reclassified the carrying amount of the land parcel of $2.8 million from Land Held for Development to Investment in Hotel Properties Under Development during the six months ended June 30, 2017 in connection with our development activities.

Assets Held for Sale

Assets held for sale at June 30, 2017 and December 31, 2016 include the following (in thousands):



	June 30, 2017		December 31, 2016
Land	$	4,149	$	10,907
Hotel buildings and improvements	15,872		44,718
Furniture, fixtures and equipment	676		6,649
Franchise fees and other	123		421
	$	20,820	$	62,695

On February 11, 2016, we completed the sale of six hotels to affiliates of American Realty Capital Hospitality Trust, Inc. ("ARCH") for an aggregate selling price of $108.3 million (the "ARCH Sale"), with the proceeds from the ARCH Sale being used to complete certain reverse 1031 Exchanges. The hotels acquired by us for 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, Nashville, TN for a purchase price of $71.0 million on January 19, 2016. The completion of the reverse 1031 Exchanges resulted in the deferral of taxable gains 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 sale of a hotel to ARCH. The ARCH Sale resulted in a $56.8 million gain, of which $20.0 million was initially deferred related to seller financing that we provided as described below.

In connection with the ARCH Sale, the Operating Partnership entered into a loan agreement with ARCH, as borrower, which provided for a loan by the Operating Partnership to ARCH in the amount of $27.5 million (the “Loan” or "Loan Agreement"). 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 acquired by ARCH as part of the ARCH Sale; and (ii) the remaining $7.5 million was applied by ARCH to fund the escrow deposit required for the purchase of eight hotels as described below. Through December 31, 2016, we had 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 March 31, 2017, ARCH repaid the remaining $22.5 million principal balance of the Loan and payment-in-kind (“PIK”) interest of $1.2 million. As such, we recognized as income during the six months ended June 30, 2017 the remaining $15.0 million of the deferred gain related to the sale of six hotels to ARCH.

Pursuant to an agreement entered into by the Company and an affiliate of ARCH on February 11, 2016, as such agreement was subsequently modified and extended, the affiliate of ARCH was to purchase ten of the Company's hotels. Two of the hotels were sold during 2016 to a purchaser not affiliated with ARCH as permitted by the agreement.

On April 27, 2017, we completed the sale of seven of the remaining eight hotels to an affiliate of ARCH for a total purchase price of $66.8 million, resulting in a net gain of approximately $16.0 million. The seven hotels sold were as follows:



Hotel	Location	Guestrooms
Courtyard by Marriott	Jackson, MS	117
Courtyard by Marriott	Germantown, TN	93
Fairfield Inn & Suites	Germantown, TN	80
Homewood Suites	Ridgeland, MS	91
Residence Inn	Jackson, MS	100
Residence Inn	Germantown, TN	78
Staybridge Suites	Ridgeland, MS	92
Total		651

The proceeds from this sale were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of approximately $20.8 million. The hotel acquired by us for the 1031 Exchange was the 261-guestroom Courtyard by Marriott, Fort Lauderdale, FL for a purchase price of $85.0 million on May 23, 2017.

On June 2, 2017, we completed the sale of the Courtyard by Marriott, El Paso, TX, which was the final hotel under contract for sale to ARCH, to a third-party purchaser that is unrelated to ARCH. The sale of this property resulted in the realization of a net gain of $0.4 million during the six months ended June 30, 2017. As a result of this sale, ARCH has fulfilled its purchase obligations to us.

Assets Held for Sale at June 30, 2017 included three hotel properties in Fort Worth, TX and land parcels in Spokane, WA and Flagstaff, AZ, which were being actively marketed for sale. Assets Held for Sale at December 31, 2016 include the hotel properties related to ARCH and the land parcels in Spokane, WA and Flagstaff, AZ, which were being actively marketed for sale.

Other Asset Sales

On March 30, 2017, we completed the sale of the Hyatt Place in Atlanta, GA for $14.5 million and repaid a related mortgage loan totaling $6.5 million. The sale of this property resulted in the realization of a net gain of $4.8 million during the six months ended June 30, 2017.

At December 31, 2015, we held two notes receivable totaling $2.7 million 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 Properties 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.

Hotel Property Acquisitions

A summary of the hotel properties acquired during the six months ended June 30, 2017 and 2016 is as follows (in thousands):



Date Acquired	Franchise/Brand	Location	Purchase Price
For the six months ended June 30, 2017
March 1, 2017	Homewood Suites	Aliso Viejo (Laguna Beach), CA	$	38,000
March 30, 2017	Hyatt Place	Phoenix (Mesa), AZ	22,200
May 23, 2017	Courtyard by Marriott	Fort Lauderdale, FL	85,000
June 9, 2017	Courtyard by Marriott	Charlotte, NC	56,250
June 21, 2017	Courtyard by Marriott	Fort Worth, TX	40,000
June 21, 2017	Courtyard by Marriott	Kansas City, MO	24,500
June 21, 2017	Courtyard by Marriott	Pittsburgh, PA	42,000
June 21, 2017	Hampton Inn & Suites	Baltimore, MD	18,000
June 21, 2017	Residence Inn by Marriott	Baltimore, MD	38,500
			$	364,450	(1)
For the six months ended June 30, 2016
January 19, 2016	Courtyard by Marriott	Nashville, TN	$	71,000
January 20, 2016	Residence Inn by Marriott	Atlanta, GA	38,000
			$	109,000	(2)


(1)	The net assets acquired totaled $367.4 million due to the purchase at settlement of $0.8 million of net working capital and other assets and capitalized transaction costs of $2.1 million, of which $0.2 million were accrued and unpaid as of June 30, 2017.


(2)	The net assets acquired totaled $109.2 million due to the purchase at settlement of $0.2 million of net working capital assets.

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 Six Months Ended June 30,
	2017				2016
Land	$	61,616			$	12,173
Hotel buildings and improvements	274,961				94,697
Intangible assets	15,710				—
Furniture, fixtures and equipment	14,314				2,130
Other assets	1,775			(1)	383			(2)
Total assets acquired	368,376				109,383
Less - other liabilities assumed	(990		)	(1)	(201		)	(2)
Net assets acquired	$	367,386			$	109,182


(1)	The net assets acquired totaled $367.4 million due to the purchase at settlement of $0.8 million of net working capital and other assets and capitalized transaction costs of $2.1 million, of which $0.2 million were accrued and unpaid as of June 30, 2017.


(2)	The net assets acquired totaled $109.2 million due to the purchase at settlement of $0.2 million of net working capital assets.

Under ASU No. 2017-01, hotel purchases completed in 2017 are the acquisition of assets and acquisition costs related to these transactions have been capitalized.

Total revenues and net income for hotel properties acquired in the six months ended June 30, 2017 and 2016, which are included in our Condensed Consolidated Statements of Operations, are as follows (in thousands):



	2017 Acquisitions		2016 Acquisitions				2017 Acquisitions		2016 Acquisitions
	For the		For the				For the		For the
	Three Months Ended June 30,		Three Months Ended June 30,				Six Months Ended June 30,		Six Months Ended June 30,
	2017		2017		2016		2017		2017		2016
Revenues	$	6,603	$	6,066	$	6,267	$	7,371	$	11,404	$	10,511
Net income	$	1,482	$	1,508	$	1,738	$	1,856	$	2,589	$	2,715

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 2017 and 2016 had taken place on January 1, 2016 and all dispositions had occurred prior to that date. 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, 2016. The pro forma amounts exclude the gain on the sale of hotel properties during the three and six months ended June 30, 2017 and 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 81 hotel properties owned at June 30, 2017 for the three and six months ended June 30, 2017 and 2016 is as follows (in thousands, except per share):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Revenues	$	140,830	$	144,572	$	271,750	$	274,072
Income from hotel operations	$	54,639	$	59,192	$	103,388	$	109,051
Net income before taxes	$	23,515	$	29,593	$	44,409	$	50,908
Net income	$	23,092	$	29,458	$	43,565	$	49,202
Net income attributable to common stockholders, net of amount allocated to participating securities	$	18,694	$	25,126	$	34,785	$	40,606
Basic and diluted net income per share attributable to common stockholders	$	0.19	$	0.29	$	0.36	$	0.47