INVESTMENT IN HOTEL PROPERTIES, NET

Investment in Hotel Properties, net

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



	September 30, 2017			December 31, 2016
Land	$	237,652		$	178,423
Hotel buildings and improvements	1,745,059			1,433,389
Intangible assets	22,764			6,602
Construction in progress	13,602			22,490
Furniture, fixtures and equipment	152,562			129,437
	2,171,639			1,770,341
Less - accumulated depreciation and amortization	(268,690		)	(225,219		)
	$	1,902,949		$	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):



	September 30, 2017			December 31, 2016
Intangible assets:
Air rights ⁽¹⁾	$	10,754		$	—
Favorable leases ⁽²⁾	10,569			6,032
In-place lease agreements	1,361			570
Other	80			—
	22,764			6,602
Less accumulated amortization	(796		)	(348		)
Intangible assets, net	$	21,968		$	6,254

Intangible liabilities:
Unfavorable leases ⁽²⁾	$	5,002		$	5,002
Less accumulated amortization	(261		)	(190		)
Intangible liabilities, net	$	4,741		$	4,812


(1)	In conjunction with the acquisition of the Courtyard by Marriott - Charlotte, NC, the Company acquired certain air rights related to 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 that we own. We expect the total development costs for the construction of the hotel to be approximately $30.0 million. We have incurred $16.0 million of costs to date and we have reclassified the $2.8 million carrying amount of the land parcel from Land Held for Development to Investment in Hotel Properties Under Development during the nine months ended September 30, 2017 as a result of our development activities.

Assets Held for Sale

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



	September 30, 2017		December 31, 2016
Land	$	1,193	$	10,907
Hotel buildings and improvements	—		44,718
Furniture, fixtures and equipment	—		6,649
Franchise fees and other	—		421
	$	1,193	$	62,695

Assets Held for Sale at September 30, 2017 included 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 the ARCH Sale and the land parcels in Spokane, WA and Flagstaff, AZ, which were being actively marketed for sale.

ARCH Sale

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 nine months ended September 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 nine months ended September 30, 2017. As a result of this sale, ARCH has fulfilled its purchase obligations to us.

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 nine months ended September 30, 2017.

On July 21, 2017, we completed the sale of three hotel properties in Fort Worth, TX for an aggregate sales price of $27.8 million, resulting in a net gain of $8.1 million. The proceeds from this sale were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of $8.6 million.

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 nine months ended September 30, 2017 and 2016 is as follows (in thousands):



Date Acquired	Franchise/Brand	Location	Purchase Price
For the nine months ended September 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
July 13, 2017	AC Hotel by Marriott	Atlanta, GA	57,500
			$	421,950	(1)
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	(2)


(1)	The net assets acquired totaled $424.8 million due to the purchase at settlement of $0.6 million of net working capital and other assets and capitalized transaction costs of $2.2 million.


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

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,
	2017				2016
Land	$	63,339			$	23,288
Hotel buildings and improvements	328,395				143,195
Intangible assets	16,162				442
Furniture, fixtures and equipment	16,294				2,948
Other assets	1,937				504
Total assets acquired	426,127				170,377
Less - other liabilities assumed	(1,354		)		(723		)
Net assets acquired	$	424,773		(1)	$	169,654		(2)


(1)	The net assets acquired totaled $424.8 million due to the purchase at settlement of $0.6 million of net working capital and other assets and capitalized transaction costs of $2.2 million.


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

Under ASU No. 2017-01, all hotel purchases completed in 2017 were deemed to be the acquisition of assets. Therefore, acquisition costs related to these transactions have been capitalized as part of the recorded amount of the acquired assets.

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



	2017 Acquisitions ⁽¹⁾		2016 Acquisitions ⁽²⁾				2017 Acquisitions ⁽¹⁾		2016 Acquisitions ⁽²⁾
	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,
	2017		2017		2016		2017		2017		2016
Revenues	$	20,913	$	9,233	$	8,071	$	28,283	$	25,929	$	18,582
Net income	$	1,960	$	1,734	$	2,568	$	3,816	$	4,965	$	5,284


(1)	Net income for the 2017 Acquisitions includes depreciation expense, real estate tax expense, interest expense, and other corporate expenses totaling $7.0 million and $8.5 million for three and nine months ended September 30, 2017, respectively.


(2)	Net income for the 2016 Acquisitions includes depreciation expense, real estate tax expense, interest expense, and other corporate expenses totaling $3.0 million and $1.9 million for three months ended September 30, 2017 and 2016, respectively, and $8.2 million and $4.6 million for the nine months ended September 30, 2017 and 2016, respectively.

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 pro forma information includes operating results for 79 hotels owned as of September 30, 2017 as if all such hotels had been owned by us since January 1, 2016. For hotels acquired by us after January 1, 2016 (the "Acquired Hotels"), we have included in the pro forma information the financial results of each of the Acquired Hotels for the period from January 1, 2016 to the date the Acquired Hotels were purchased by us (the "Preacquisition Period"). The financial results for the Pre-Acquisition Period were provided by the third-party owner of such Acquired Hotel prior to purchase by us and such information has not been audited or reviewed by our auditors or adjusted by us. For hotels sold by us between January 1, 2016 and September 30, 2017 (the "Disposed Hotels"), the unaudited pro forma information excludes the financial results of each of the Disposed Hotels for the period of ownership by us from January 1, 2016 through the date that the Disposed Hotels were sold by us. The unaudited pro forma information is included to enable comparison of results for the current reporting period to results for the comparable period of the prior year and is not 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 nine months ended September 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 79 hotel properties owned at September 30, 2017 for the three and nine months ended September 30, 2017 and 2016 is as follows (in thousands, except per share):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Revenues	$	136,369	$	135,373	$	405,289	$	408,104
Income from hotel operations	$	50,458	$	52,250	$	152,282	$	160,450
Net income before taxes⁽¹⁾	$	14,234	$	25,181	$	58,044	$	79,569
Net income ⁽¹⁾	$	14,465	$	26,426	$	57,431	$	76,108
Net income attributable to common stockholders, net of amount allocated to participating securities ⁽¹⁾	$	10,162	$	21,275	$	44,359	$	62,357
Basic and diluted net income per share attributable to common stockholders ⁽¹⁾	$	0.10	$	0.25	$	0.45	$	0.72
Diluted net income per share attributable to common stockholders ⁽¹⁾	$	0.10	$	0.24	$	0.45	$	0.71


(1)	Pro Forma amounts include depreciation expense, real estate tax expense, interest expense, income tax expense, and other corporate expenses totaling $46.2 million and $34.3 million for three months ended September 30, 2017 and 2016, respectively, and $124.3 million and $110.9 million for the nine months ended September 30, 2017 and 2016, respectively.