INVESTMENT IN HOTEL PROPERTIES, NET

9 Months Ended

Sep. 30, 2019

Investment in Hotel Properties, net

Investment in hotel properties, net is as follows (in thousands):



	September 30, 2019			December 31, 2018
Hotel buildings and improvements	$	1,829,056		$	1,916,194
Land	281,497			288,833
Furniture, fixtures and equipment	155,706			165,026
Construction in progress	28,216			21,059
Intangible assets	11,231			22,064
Real estate development loan	4,104			—
	2,309,810			2,413,176
Less - accumulated depreciation and amortization	(360,650		)	(347,622		)
	$	1,949,160		$	2,065,554

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which changed lessee accounting to reflect the financial liability and right-of-use assets that are inherent to leasing an asset on the balance sheet. In accordance with ASU No. 2016-02, we reclassified certain existing lease-related intangible assets to Right-of-use assets as of the required implementation date of January 1, 2019 (See "Note 6 - Leases" for further information).

We provided a mezzanine loan to fund up to $28.9 million for a mixed-use development project that includes a hotel property, retail space, and parking. We have classified the mezzanine loan as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at September 30, 2019 (See "Note 4 - Investment in Real Estate Loans" for further information).

Asset Sales

On April 17, 2019, we completed the sale of six hotel properties as follows:



Franchise/Brand	Location	Guestrooms
SpringHill Suites	Minneapolis (Bloomington), MN	113
Hampton Inn & Suites	Minneapolis (Bloomington), MN	146
Residence Inn	Salt Lake City, UT	189
Hyatt Place	Dallas (Arlington), TX	127
Hampton Inn	Santa Barbara (Goleta), CA	101
Hampton Inn	Boston (Norwood), MA	139
Total		815

The sale resulted in a net gain of $36.6 million based on a gross aggregate sales price of $135.0 million, or a net aggregate sales price of $133.0 million after a buyer credit of $2.0 million, for the nine months ended September 30, 2019.

On February 12, 2019, we completed the sale of two hotel properties, the Country Inn & Suites - Charleston, WV and the Holiday Inn Express - Charleston, WV, for an aggregate sales price of $11.6 million. The sale of these properties resulted in the realization of an aggregate gain of $4.2 million for the nine months ended September 30, 2019.

On September 28, 2018, we sold the Hyatt Place in Fort Myers, FL and adjacent land for $16.5 million. The sale of this property resulted in the realization of a net gain of $2.2 million during the three and nine months ended September 30, 2018.

On July 24, 2018, we completed the sale of three hotel properties, the Hilton Garden Inn - Smyrna, TN, the Hampton Inn & Suites - Smyrna, TN, and the Hyatt Place Phoenix North - Phoenix, AZ, for an aggregate sales price of $46.5 million. The sales of these three properties resulted in the realization of an aggregate net gain of $23.0 million during the three and nine months ended September 30, 2018. The proceeds from these sales were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of $22.2 million.

On June 29, 2018, we sold the Holiday Inn Express & Suites in Sandy, UT and the Hampton Inn in Provo, UT, for an aggregate selling price of $19.0 million. On June 29, 2018 we also sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. The sales of these four properties resulted in the realization of an aggregate net gain of $17.4 million during the nine months ended September 30, 2018. We provided seller financing of $3.6 million, on the sale of the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA, under two three-and-a-half-year loans secured by second mortgages with a blended interest rate of 7.38%.

Developed Properties

We completed the development and commenced operations of the new 168-guestroom Hyatt House Across From Orlando Universal Resort™ on June 27, 2018. The total construction cost for this hotel was $32.7 million, excluding land that we acquired in a prior-year transaction. The carrying amount for this hotel includes internal capitalized costs of $1.6 million. Total costs of $37.1 million, including the carrying amount of the land, were reclassified as Investment in hotel properties, net upon completion.

Hotel Property Acquisitions

A summary of the hotel properties acquired during the nine months ended September 30, 2019 and 2018 is as follows (dollars in thousands):



Date Acquired	Franchise/Brand	Location	Guestrooms	Purchase Price
For the nine months ended September 30, 2019
August 6, 2019	Hampton Inn & Suites	Silverthorne, CO	88	$	25,500
			88	$	25,500	⁽¹⁾

For the nine months ended September 30, 2018
September 12, 2018	Residence Inn by Marriott	Boston (Watertown), MA	150	$	71,000
			150	$	71,000	⁽²⁾

(1) The net assets acquired totaled $28.1 million due to the purchase of adjacent land parcels totaling $2.4 million, $0.1 million of net working capital assets and capitalized transaction costs of $0.1 million.

(2) The net assets acquired totaled $71.0 million due to the purchase of $0.1 million of net working capital liabilities and capitalized transaction costs of $0.1 million.

On January 31, 2019, we exercised our option pursuant to a ground lease agreement to purchase the land under our Residence Inn by Marriott in Baltimore (Hunt Valley), MD for $4.2 million, which resulted in a termination of obligations under the ground lease. As a result, this hotel property is no longer subject to a ground lease.

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,
	2019			2018
Land	$	6,845		$	25,083
Hotel buildings and improvements	20,652			42,676
Furniture, fixtures and equipment	465			3,300
Other assets	207			185
Total assets acquired	28,169			71,244
Less other liabilities	(70		)	(242		)
Net assets acquired	$	28,099		$	71,002

All hotel purchases completed in 2019 and 2018 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.

The results of operations of acquired 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 70 hotels owned as of September 30, 2019 as if all such hotels had been owned by us since January 1, 2018. For hotels acquired by us after January 1, 2018 (the "Acquired Hotels"), we have included in the pro forma information the financial results of each of the Acquired Hotels for the period prior to acquisition 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, 2018 and September 30, 2019 (the "Disposed Hotels"), the unaudited pro forma information excludes the financial results, including gains on disposal of assets, of each of the Disposed Hotels for the period of ownership by us from January 1, 2018 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, 2018. The pro forma amounts exclude the gain or loss on the sale of hotel properties during the three and nine months ended September 30, 2019 and 2018. 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 70 hotel properties owned at September 30, 2019 for the three and nine months ended September 30, 2019 and 2018 is as follows (in thousands, except per share):



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Revenues	$	134,257	$	134,071	$	409,595	$	398,502
Income from hotel operations	$	48,289	$	49,966	$	152,864	$	149,598
Net income ⁽¹⁾	$	11,910	$	13,384	$	37,284	$	42,088
Net income attributable to common stockholders, net of amount allocated to participating securities ^{(1) (2)}	$	8,101	$	9,525	$	25,839	$	25,524
Basic and diluted net income per share attributable to common stockholders ^{(1) (2)}	$	0.08	$	0.09	$	0.25	$	0.25


(1)	Pro forma amounts include depreciation expense, property tax expense, interest expense, income tax expense, loss on impairment of assets and other corporate expenses totaling $46.3 million and $44.8 million for the three months ended September 30, 2019 and 2018, respectively; and $144.1 million and $135.4 million for the nine months ended September 30, 2019 and 2018, respectively.


(2)	Pro forma amounts for the nine months ended September 30, 2018 include the effect of the premium on redemption of preferred stock of $3.3 million.

Loss on Impairment of Assets

During the nine months ended September 30, 2019, the Company recorded an impairment charge of $1.7 million for the Hyatt Place - Chicago (Hoffman Estates) to reduce the net carrying amount of the property to its estimated net fair market value of $5.9 million, which was determined by a third-party independent appraisal.

Assets Held for Sale

Assets held for sale at September 30, 2019 consists of two hotel properties in Birmingham, AL that are under contract to be sold and a 1.29 acre parcel of land. Assets held for sale at December 31, 2018 included two properties that were sold on February 12, 2019 and a 1.29 acre parcel of land. Assets held for sale were as follows (in thousands):



	September 30, 2019			December 31, 2018
Hotel buildings and improvements	$	18,278		$	7,929
Land	3,293			2,442
Furniture, fixtures and equipment	1,832			2,519
Franchise fees	65			131
	23,468			13,021
Less - accumulated depreciation and amortization	(6,098		)	(5,388		)
	$	17,370		$	7,633