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INVESTMENT IN HOTEL PROPERTIES

12 Months Ended

Dec. 31, 2019

Investment in Hotel Properties, net

Investment in hotel properties, net at December 31, 2019 and 2018 include (in thousands):



	2019			2018
Land	$	319,603		$	288,833
Hotel buildings and improvements	2,049,384			1,916,194
Furniture, fixtures and equipment	173,128			165,026
Construction in progress	9,388			21,059
Intangible assets	11,231			22,064
Real estate development loan	5,485			—
	2,568,219			2,413,176
Less - accumulated depreciation	(383,987		)	(347,622		)
	$	2,184,232		$	2,065,554

During the year ended December 31, 2019, 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 Consolidated Balance Sheets at December 31, 2019 (See "Note 4 - Investment in Real Estate Loans" for further information).

Depreciation expense was $99.0 million, $100.5 million, and $85.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Intangible assets included in Investment in hotel properties, net in our Consolidated Balance Sheets include the following (in thousands):



	Weighted Average Amortization Period (in Years)	2019			2018
Intangible assets:
Air rights ⁽¹⁾	n/a	$	10,754		$	10,754
Favorable leases ⁽²⁾	n/a	—			10,550
In-place lease agreements	2.0	397			680
Other	n/a	80			80
		11,231			22,064
Less - accumulated amortization		(224		)	(1,108		)
Intangible assets, net		$	11,007		$	20,956


(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)	In accordance with ASU No. 2016-02, Leases (Topic 842), we reclassified certain existing lease-related intangible assets to Right-of-use assets as of January 1, 2019 (See "Note 7 - Leases" for further information).

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



	Finite-Lived Intangible Assets
2020	$	87
2021	86
	$	173

Hotel Property Acquisitions

Hotel property acquisitions in 2019 and 2018 were as follows (in thousands):



Date Acquired	Franchise/Brand	Location	Guestrooms	Purchase Price
Year Ended December 31, 2019
August 6, 2019	Hampton Inn & Suites	Silverthorne, CO	88	$	25,500
October 8, 2019	Portfolio Purchase - four properties⁽¹⁾	various⁽¹⁾	710	249,000
			798	$	274,500	⁽²⁾

Year Ended December 31, 2018
September 12, 2018	Residence Inn by Marriott	Boston (Watertown), MA	150	$	71,000
			150	$	71,000	⁽³⁾

(1) On October 8, 2019, we acquired a portfolio of four hotels for an aggregate purchase price of $249.0 million. The hotels acquired included the Hilton Garden Inn - San Francisco, CA, the Hilton Garden Inn - San Jose (Milpitas), CA, the Residence Inn by Marriott - Portland (Downtown), OR, and the Residence Inn by Marriott - Portland (Hillsboro), OR.


(2)	The net assets acquired in 2019 were purchased for $274.5 million plus the purchase of adjacent land parcels totaling $2.4 million, $1.0 million of net working capital assets and capitalized transaction costs of $0.4 million. We own a 51% controlling interest in these hotel properties through a consolidated joint venture.


(3)	The net assets acquired in 2018 were purchased for $71.0 million plus the purchase at settlement of $0.1 million of net working capital liabilities and capitalized transaction costs of $0.1 million.

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):



	2019			2018
Land	$	44,868		$	25,083
Hotel buildings and improvements	219,410			42,676
Furniture, fixtures and equipment	12,995			3,300
Other assets	1,103			123
Total assets acquired	278,376			71,182
Less other liabilities	(79		)	(180		)
Net assets acquired ^{(1) (2)}	$	278,297		$	71,002


(1)	The net assets acquired in 2019 were purchased for $274.5 million plus the purchase of adjacent land parcels totaling $2.4 million, $1.0 million of net working capital assets and capitalized transaction costs of $0.4 million.


(2)	The net assets acquired in 2018 were purchased for $71.0 million plus the purchase at settlement of $0.1 million of net working capital liabilities and capitalized transaction costs of $0.1 million.

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.

On January 31, 2019, we exercised our option pursuant to a ground lease agreement to purchase the land upon which our Residence Inn by Marriott in Baltimore (Hunt Valley), MD is located 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.

On December 4, 2019, we exercised our right to acquire a fee simple interest in the land upon which our Hyatt Place in Garden City, NY is located for nominal consideration. As a result, the hotel is no longer subject to a PILOT (payment in lieu of taxes) lease with the Town of Hempstead Industrial Development Authority.

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 pro forma information includes operating results for 72 hotels owned as of December 31, 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 unaudited pro forma information the financial results of each of the Acquired Hotels for the period from January 1, 2018 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, 2018 and December 31, 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 unaudited pro forma amounts exclude the gain or loss on the sale of hotel properties during the years ended December 31, 2018 and 2019. 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 72 hotel properties owned at December 31, 2019 for the twelve months ended December 31, 2019 and 2018 is as follows (in thousands, except per share):



	2019		2018
Revenues	$	572,262	$	562,097
Income from hotel operations	$	215,372	$	215,931
Net income ⁽¹⁾	$	57,909	$	71,478
Net income attributable to common stockholders, net of amount allocated to participating securities and non-controlling interests ^{(1) (2)}	$	33,671	$	38,803
Basic and diluted net income per share attributable to common stockholders ^{(1) (2)}	$	0.32	$	0.37


(1)	Unaudited pro forma amounts include depreciation expense, property tax expense, interest expense, income tax expense, and corporate general and administrative expenses totaling $197.1 million and $181.9 million for the twelve months ended December 31, 2019 and 2018, respectively.


(2)	Unaudited pro forma amounts for the twelve months ended December 31, 2018 include the effect of the premium on redemption of preferred stock of $3.3 million and higher preferred dividends of $1.8 million related to the redeemed preferred stock.

Developed Properties

We completed the development and commenced operations of the 168-guestroom Hyatt House Across From Orlando Universal Resort™ on June 27, 2018. The total construction cost for this hotel was $32.8 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 $37.2 million, including the carrying amount of the land, were reclassified as Investment in hotel properties, net upon completion.

Asset Sales

A summary of the dispositions in 2019 and 2018 follows (dollars in thousands):



Disposition Date	Franchise/Brand	Location	Guestrooms	Gross Sales Price		Aggregate Gain, net
Year Ended December 31, 2019
February 12, 2019	Portfolio Sale - two properties⁽¹⁾	Charleston, WV ⁽¹⁾	130	$	11,600	$	4,163
April 17, 2019	Portfolio Sale - six properties ⁽²⁾	various ⁽²⁾	815	135,000		36,626
November 8, 2019	Portfolio Sale - two properties ⁽³⁾	Birmingham, AL ⁽³⁾	225	21,800		4,857
Total			1,170	$	168,400	$	45,646
Year Ended December 31, 2018
June 29, 2018	Portfolio Sale - two properties⁽⁴⁾	various ⁽⁴⁾	175	$	18,950	$	13,133
June 29, 2018	Portfolio Sale - two properties ⁽⁵⁾	Duluth, GA ⁽⁵⁾	265	24,850		4,218
July 24, 2018	Portfolio Sale - three properties ⁽⁶⁾	various ⁽⁶⁾	322	46,500		22,964
September 28, 2018	Hyatt Place	Fort Myers, FL	148	16,500		2,195
November 7, 2018	Land parcel	Spokane, WA	n/a	450		139
Total			910	$	107,250	$	42,649


(1)	The portfolio included the Country Inn & Suites and the Holiday Inn Express in Charleston, WV.

(2)

The portfolio included the SpringHill Suites in Minneapolis (Bloomington), MN, the Hampton Inn & Suites in Minneapolis (Bloomington), MN, the Residence Inn in Salt Lake City, UT, the Hyatt Place in Dallas (Arlington), TX, the Hampton Inn in Santa Barbara (Goleta), CA, and the Hampton Inn in Boston (Norwood), MA. 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.


(3)	The portfolio included the Hilton Garden Inn in Birmingham (Lakeshore), AL and the Hilton Garden Inn in Birmingham (Liberty Park), AL.


(4)	The portfolio included the Hampton Inn in Provo, UT and the Holiday Inn Express & Suites in Sandy, UT.


(5)	The portfolio included the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA. We provided seller financing of $3.6 million on the sale of these properties under two three-and-a-half-year second mortgage notes with a blended interest rate of 7.38%.


(6)	The portfolio included the Hampton Inn & Suites in Smyrna, TN, the Hilton Garden Inn in Smyrna, TN and the Hyatt Place Phoenix North in Phoenix, AZ. The proceeds from these sales were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of $22.2 million.

Loss on Impairment of Assets

During the year ended December 31, 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.

During the year ended December 31, 2019, the Company also recorded impairment charges on two land parcels to reduce the net carrying amounts of the properties to their estimated fair market values based on third-party independent appraisals and a purchase contract for the sale of one of the land parcels that is expected to be completed in 2020. In 2018, we recorded impairment charges on two land parcels to reduce the net carrying amounts of the properties to their estimated fair market values based on third-party independent appraisals.

INVESTMENT IN REAL ESTATE LOANS

Investment in real estate loans, net at December 31, 2019 and 2018 is as follows (in thousands):



	2019			2018
Real estate loans	$	32,831		$	34,650
Unamortized discount	(1,895		)	(3,950		)
	$	30,936		$	30,700

The amortized cost bases of our Investment in real estate loans approximate their fair value. The amortized cost bases and the contractual maturities of our Investment in real estate loans outstanding at December 31, 2019 are $28.9 million in 2020 and $2.0 million in 2021.

Real Estate Development Loans

We provided mezzanine loans on three real estate development projects to fund up to an aggregate of $29.6 million for the development of three hotel properties. The three real estate development loans closed in the fourth quarter of 2017 and each has a stated interest rate of 8% and an initial term of approximately three years. Interest income on the mezzanine loans will be recorded in our Consolidated Statement of Operations as it is earned. As of December 31, 2019, we have funded the full amount of $29.6 million. We have separate options related to each loan (each the "Initial Option") to purchase a 90% interest in each joint venture that owns the respective hotel upon completion of construction. The Initial Options are exercisable while the related real estate development loan is outstanding. We also have the right to purchase the remaining interests in each joint venture at future dates, generally five years after we exercise our Initial Option. We have recorded the aggregate estimated fair value of the Initial Options totaling $6.1 million in Other assets and as a discount to the related real estate loans. The discount will be amortized as a component of non-cash interest income over the initial term of the real estate loans using the straight-line method, which approximates the interest method. We recorded amortization of the discount of $2.1 million and $2.0 million during the years ended December 31, 2019 and 2018, respectively. We intend to hold our Investment in Real Estate Loans to maturity and therefore, such loans are recorded as held-to-maturity.

During the year ended December 31, 2019, 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. The loan closed in the third quarter of 2019 and has a stated interest rate of 9% and an initial term of 30 months. The loan is secured by a second mortgage on the development project and a pledge of the equity in the project owner. As of December 31, 2019, we have funded $7.9 million of the loan commitment. Upon completion of construction, we have an option to purchase a 90% interest in the hotel (the “Initial Purchase Option”). We also have the right to purchase the remaining interest in the hotel five years after the completion of construction. We have issued a $10.0 million letter of credit under our senior unsecured credit facility to secure the exercise of the Initial Purchase Option. As such, we have classified the loan as Investment in hotel properties, net on our Consolidated Balance Sheets at December 31, 2019. Interest income on the mezzanine loan will be recorded in our Consolidated Statement of Operations as it is earned. We have recorded the aggregate estimated fair value of the Initial Purchase Option totaling $2.8 million in Other assets and as a contra-asset to Investment in hotel properties, net. The contra-asset will be amortized as a component of non-cash interest income over the term of the real estate development loan using the straight-line method, which approximates the interest method. During the year ended December 31, 2019, we amortized $0.4 million as non-cash interest income.

Seller-Financing Loans

On June 29, 2018, we sold the Holiday Inn in Duluth, GA and the Hilton Garden Inn in Duluth, GA for an aggregate selling price of $24.9 million. We provided seller financing totaling $3.6 million on the sale of these properties under two, 3.5 year second mortgage notes with a blended interest rate of 7.38%. As of December 31, 2019, there was $2.5 million outstanding on the seller-financing loans.