INVESTMENT IN HOTEL PROPERTIES

Investment in Hotel Properties, net

Investment in hotel properties, net at December 31, 2017 and 2016 include (in thousands):



	2017			2016
Land	$	272,932		$	178,423
Hotel buildings and improvements	1,868,273			1,433,389
Intangible assets	22,764			6,602
Construction in progress	12,464			22,490
Furniture, fixtures and equipment	174,126			129,437
	2,350,559			1,770,341
Less - accumulated depreciation	(291,067		)	(225,219		)
	$	2,059,492		$	1,545,122

Depreciation expense was $85.5 million, $72.1 million, and $63.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

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



	2017			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	(1,001		)	(348		)
Intangible assets, net	$	21,763		$	6,254

Intangible liabilities:
Unfavorable leases ⁽²⁾	$	5,002		$	5,002
Less accumulated amortization	(285		)	(190		)
Intangible liabilities, net	$	4,717		$	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.

The finite-lived intangible assets are being amortized using the straight-line method over a weighted average amortization period of 37.1 years. The intangible liabilities are being amortized using the straight-line method over a weighted average amortization period of 55.7 years.

Future amortization expense is expected to be as follows (in thousands):



	Finite-Lived Intangible Assets		Intangible Liabilities
2018	$	699	$	95
2019	499		95
2020	370		95
2021	360		95
2022	274		95
Thereafter	8,727		4,242
	$	10,929	$	4,717

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 $21.0 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 year ended December 31, 2017 as a result of our development activities. We anticipate that construction of this hotel will be complete by mid-year 2018 and the hotel will be open for business shortly thereafter.

Assets Held for Sale

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



	2017		2016
Land	$	1,193	$	10,907
Hotel building and improvements	—		44,718
Furniture, fixtures and equipment	—		6,649
Construction in progress	—		29
Franchise fees	—		392
	$	1,193	$	62,695

Assets Held for Sale at December 31, 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 HIT Sale and the land parcels in Spokane, WA and Flagstaff, AZ, which were being actively marketed for sale.

Dispositions to Affiliates of Hospitality Investors Trust, Inc. (formerly American Realty Capital Hospitality Trust, Inc.)

On February 11, 2016, we completed the sale of six hotels to affiliates of Hospitality Investors Trust, Inc. ("HIT") for an aggregate selling price of $108.3 million (the "HIT Sale"), with the proceeds from the HIT 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 HIT. The HIT 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 HIT Sale, the Operating Partnership entered into a loan agreement with HIT, as borrower, which provided for a loan by the Operating Partnership to HIT in the amount of $27.5 million (the “Loan” or "Loan Agreement"). The proceeds of the Loan were required to be applied by HIT 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 HIT as part of the HIT Sale; and (ii) the remaining $7.5 million was applied by HIT 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 HIT. On March 31, 2017, HIT 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 year ended December 31, 2017 the remaining $15.0 million of the deferred gain related to the sale of six hotels to HIT.

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

On April 27, 2017, we completed the sale of seven of the remaining eight hotels to an affiliate of HIT 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
		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 HIT, to a third-party purchaser that is unrelated to HIT. The sale of this property resulted in the realization of a net gain of $0.4 million during the year ended December 31, 2017. As a result of this sale, HIT 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 year ended December 31, 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.

On May 13, 2016, we completed the sale of the Holiday Inn Express & Suites in Irving (Las Colinas), TX for $10.5 million.

We also completed the sale of two properties previously contracted for sale to HIT to third parties unrelated to HIT. The first sale was the Aloft in Jacksonville, FL for $8.6 million on June 1, 2016. The second sale was the Holiday Inn Express in Vernon Hills, IL for $5.9 million on June 7, 2016. The proceeds from the sale of the Holiday Inn Express & Suites in Irving (Las Colinas), TX and the Holiday Inn Express in Vernon Hills, IL were used to complete a reverse 1031 Exchange with the acquisition of 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.

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 were used to complete a 1031 Exchange related to the purchase of the 157-guestroom Marriott in Boulder, CO on August 9, 2016 for a purchase price of $61.4 million. The completion of the 1031 Exchange resulted in the deferral of taxable gains of approximately $7.5 million.

Hotel Property Acquisitions

Hotel property acquisitions in 2017 and 2016 were as follows (in thousands):



Date Acquired	Franchise/Brand	Location	Guestrooms	Purchase Price
Year Ended December 31, 2017
March 1, 2017	Homewood Suites	Aliso Viejo (Laguna Beach), CA	129	$	38,000
March 30, 2017	Hyatt Place	Phoenix (Mesa), AZ	152	22,200
May 23, 2017	Courtyard by Marriott	Fort Lauderdale, FL	261	85,000
June 9, 2017	Courtyard by Marriott	Charlotte, NC	181	56,250
June 21, 2017	Courtyard by Marriott	Fort Worth, TX	203	40,000
June 21, 2017	Courtyard by Marriott	Kansas City, MO	123	24,500
June 21, 2017	Courtyard by Marriott	Pittsburgh, PA	182	42,000
June 21, 2017	Hampton Inn & Suites	Baltimore, MD	116	18,000
June 21, 2017	Residence Inn by Marriott	Baltimore, MD	188	38,500
July 13, 2017	AC Hotel by Marriott	Atlanta, GA	255	57,500
November 14, 2017	Courtyard by Marriott	New Haven, CT	207	63,400
November 14, 2017	Hilton Garden Inn	Waltham, MA	148	32,300
November 14, 2017	Homewood Suites	Tucson, AZ	122	25,300
November 14, 2017	Residence Inn by Marriott	Cleveland, OH	175	43,000
			2,442	$	585,950	⁽¹⁾
Year Ended December 31, 2016
January 19, 2016	Courtyard by Marriott	Nashville, TN	226	$	71,000
January 20, 2016	Residence Inn by Marriott	Atlanta, GA	160	38,000
August 9, 2016	Marriott	Boulder, CO	157	61,400
October 28, 2016	Hyatt Place	Chicago, IL	206	73,750
			749	$	244,150	⁽²⁾


(1)	The net assets acquired totaled $588.8 million due to the purchase at settlement of $0.2 million of net working capital assets and capitalized transaction costs of $2.6 million.


(2)	The net assets acquired totaled $244.7 million due to the purchase at settlement of $0.6 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):



	2017			2016
Land	$	98,639		$	28,683
Hotel buildings and improvements	447,477			207,433
Intangible assets	16,162			442
Furniture, fixtures and equipment	26,546			8,081
Other assets	2,738			798
Total assets acquired	591,562			245,437
Less other liabilities	(2,740		)	(723		)
Net assets acquired	$	588,822		$	244,714

Total revenues and net income for hotel properties acquired in 2017 and 2016, which are included in our Consolidated Statements of Operations for the years ended December 31, 2017 and 2016, are as follows (in thousands):



	2017 Acquisitions		2016 Acquisitions
	2017 ⁽¹⁾		2017		2016 ⁽¹⁾
Revenues	$	53,443	$	47,842	$	28,560
Net income	$	5,914	$	8,736	$	6,992


(1)	The results of operations of acquired hotel properties are included beginning on their respective acquisition dates; therefore, the results are for a partial period in the year acquired.

The results of operations of acquired hotel properties are included in the 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. 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 "Pre-Acquisition 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 December 31, 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 years ended December 31, 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 2017 and 2016 is as follows (in thousands, except per share):



	2017		2016
	(unaudited)
Revenues	$	567,342	$	562,030
Income from hotel operations ⁽¹⁾	$	211,730	$	217,414
Net income ⁽²⁾	$	76,292	$	106,909
Net income attributable to common stockholders, net of amount allocated to participating securities ⁽²⁾	$	55,803	$	85,761
Basic net income per share attributable to common stockholders ⁽²⁾	$	0.56	$	0.99
Diluted net income per share attributable to common stockholders ⁽²⁾	$	0.56	$	0.98


(1)	Pro Forma amounts include real estate tax expense totaling $31.9 million and $27.5 million for the years ended December 31, 2017 and 2016, respectively.


(2)	Pro Forma amounts include depreciation expense, real estate tax expense, interest expense, income tax expense, and other corporate expenses totaling $166.8 million and $139.3 million for the years ended December 31, 2017 and 2016, respectively.