INVESTMENT IN HOTEL PROPERTIES, NET

6 Months Ended

Jun. 30, 2022

Investment in Hotel Properties, net

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


	June 30, 2022		December 31, 2021
Hotel buildings and improvements	$	2,840,004	$	2,127,782
Land	378,105		323,276
Furniture, fixtures and equipment	253,936		167,245
Construction in progress	38,444		18,321
Intangible assets	39,954		10,834
Real estate development loan	—		27,595
	3,550,443		2,675,053
Less accumulated depreciation	(651,931)		(583,080)
	$	2,898,512	$	2,091,973

During the year ended December 31, 2019, we executed a mezzanine loan to provide financing of $29.9 million for a mixed-use development project that includes the AC/Element Hotel with 264 guestrooms, retail space, and parking. In connection with the mezzanine loan, we had a purchase option to purchase a 90% equity interest in the AC/Element Hotel (the "Initial Purchase Option") upon completion of construction, which occurred in December 2021. The mezzanine loan was classified as Investment in hotel properties, net in our Condensed Consolidated Balance Sheets at December 31, 2021. See "Note 4 - Investment in Real Estate Loans" for further information. In June 2022, the balance of the mezzanine loan was extinguished with the exercise of the Initial Purchase Option to acquire the AC/Element Hotel as part of the Brickell Transaction described below.

Brickell Transaction

On June 10, 2022, we formed the Brickell Joint Venture (see "Note 9 - Non-controlling Interests and Redeemable Non-controlling Interests") to facilitate the exercise of our Initial Purchase Option to acquire a 90% equity interest in the AC/Element Hotel. The exercise price of the Initial Purchase Option was $89.0 million and primarily funded with the conversion of the mezzanine loan of $29.9 million to equity and $7.9 million in cash. We accounted for the acquisition of the AC/Element Hotel as an asset acquisition. The allocation of the purchase price to the assets acquired and liabilities assumed for the acquisition of the AC/Element Hotel is as follows (in thousands):


Assets and Liabilities Acquired			Net Cash Disbursed
Land	$	14,378	Purchase price (1)	$	94,522
Hotel buildings and improvements	75,113		Acquisition costs	593
Furniture, fixtures and equipment	5,624			$	95,115
Intangible assets	1,972
Total assets acquired	97,087		Cash	$	8,518
Debt assumed	(47,000)		Conversion of mezzanine loan	29,875
Other liabilities	(1,972)		Initial purchase option	2,800
Net assets acquired	$	48,115	Contribution by joint venture partner	6,922
			Debt assumed	47,000
				$	95,115

(1) The purchase price of the Brickell Transaction was based on the exercise price of the initial purchase option of $89.0 million. The transaction included the assumption of $47.0 million of debt resulting in a net consideration payment requirement of $42.0 million. We paid 90% of the required net consideration with the conversion of our $29.9 million mezzanine loan into equity and a cash payment of $7.9 million. The carrying amount of our Initial Purchase Option of $2.8 million is also included in the total amount allocated to the assets acquired. The Brickell Joint Venture partner’s non-controlling interest represents 10% of the fair value of the net assets on the transaction date of $6.9 million, determined by a third-party valuation expert based on discounted forecasted future cash flows of the net assets acquired. We also incurred $0.6 million of transaction costs. The result is a total amount allocated to the assets acquired of $95.1 million plus an intangible asset totaling $2.0 million related to the assumption of the franchises for the hotel properties and a related key money liability.

We also have an option to purchase the remaining 10% interest in the hotel property in December 2026 (the "Second Purchase Option"). The exercise price of the Second Purchase Option will be at its market value on the exercise date.

NCI Transaction

During the quarter ended March 31, 2022, the Operating Partnership and the GIC Joint Venture closed on the NCI Transaction for the acquisition of a portfolio of 27 hotel properties, containing an aggregate of 3,709 guestrooms, and two parking structures, containing 1,002 spaces, and various financial incentives for an aggregate purchase price of $822.0 million, paid in

the form of 15,864,674 Common Units (deemed value of $10.0853 per unit), 2,000,000 preferred units of limited partnership of

the Operating Partnership newly designated as 5.25% Series Z Cumulative Perpetual Preferred Units (Liquidation Preference

$25 Per Unit) (the “Series Z Preferred Units”), a cash draw of $410.0 million from a term loan entered into by subsidiaries of the Joint Venture, the assumption by a subsidiary of the Joint Venture of approximately $6.5 million in PACE loan debt,

$5.9 million of cash contributed to escrow in the prior year by GIC, as a limited partner in the Joint Venture, and approximately

$185.2 million cash contributed by GIC at closing. GIC also contributed to the Joint Venture an additional $18.5 million in cash

for estimated pre-acquisition costs related to the NCI Transaction, a portion of which was distributed to the Operating

Partnership as reimbursement for transaction costs paid by the Operating Partnership.

We valued the Common Units and Series Z Preferred Units at fair market value on the closing dates of the NCI Transaction,

which resulted in us recording the issued Common Units and Series Z Preferred Units at $157.5 million and $50.0 million,

respectively. The Common Units were recorded at the closing prices of our Common Stock on the closing dates since the

Common Units are redeemable for shares of our Common Stock on a 1:1 basis. We estimated the fair value of the Series Z

Preferred Units based on the features and stated dividend coupon of the Series Z Preferred Units relative to similar securities

with more readily determinable market values. We recorded the Series Z Preferred Units at their redemption value of

$50.0 million which approximates fair value on the closing dates.

Our Joint Venture assumed $335.2 million of debt in connection with the NCI Transaction and immediately repaid

$328.7 million of the assumed debt on the closing date using proceeds from borrowings on the Joint Venture Term Loan (as

described below). We recorded debt assumed in connection with the NCI Transaction at its face amount, which approximated fair market value on the closing date.

The allocation of the aggregate purchase price to the fair value of the assets and liabilities acquired for the NCI Transaction is as follows (in thousands):


Assets and Liabilities Acquired			Net Cash Disbursed
Land	$	52,797	Purchase price (1)	$	823,056
Hotel buildings and improvements	676,607		Acquisition costs	3,027
Furniture, fixtures and equipment	76,729		Deferred financing fees	4,625
Incentives and other intangibles	23,670			$	830,708
Other assets (2)	5,318
Total assets acquired	835,121		Cash	$	208,819
Debt assumed	(335,205)		Preferred Operating Partnership Units	50,000
Other liabilities (3)	(9,361)		Common Units (1)	157,513
Net assets acquired	$	490,555	Debt	414,376
				$	830,708

(1) The contractual purchase price for the NCI Transaction was $822.0 million based on the issuance of Common OP Units totaling $160.0 million on the contract date. However, the fair value of the Common OP Units on the closing dates totaled $157.5 million based on the closing prices of our Common Stock on January 13, 2022 and March 23, 2022 of $9.94 and $9.61 per share, respectively. As such, the purchase price has been adjusted to reflect the fair value of the Common Units issued on the closing dates of the NCI Transaction plus additional costs incurred to close the transaction.

(2) Amount includes right-of-use assets related to assumed leases totaling approximately $5.3 million.

(3) Amount includes assumed key money liabilities of approximately $3.9 million, lease liabilities of approximately $5.1 million, and other liabilities of approximately $0.4 million.

Incentives and other intangibles include tax incentives totaling approximately $19.8 million associated with certain of the acquired hotel properties in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 9.1 years, which is the period in which we expect to meet the requirements to receive payment of the tax incentives. Other intangible assets totaling approximately $3.9 million are related to key money associated with certain of the hotel properties acquired in the NCI Transaction and are being amortized over a weighted average amortization period of approximately 19.7 years, which is the remaining key money contract period with the franchisor.

Intangible assets, net is as follows (in thousands):


	June 30, 2022		December 31, 2021
Indefinite-lived Intangible assets:
Air rights	$	10,754	$	10,754
Other	80		80
	10,834		10,834
Finite-lived intangible assets:

Tax incentives	19,750		—
Key money	9,370		—


	29,120		—
Intangible assets	39,954		10,834
Less accumulated amortization	(3,067)		—
Intangible assets, net	$	36,887	$	10,834

We recorded amortization expense related to intangible assets of approximately $1.1 million and $2.0 million for the three and six months ended June 30, 2022, respectively. We did not record any amortization expense related to intangible assets for the three and six months ended June 30, 2021.

Future amortization expense related to intangible assets is as follows (in thousands):


2022	$	2,165
2023	4,331
2024	4,296
2025	1,625
2026	1,625
Thereafter	12,011
	$	26,053

We did not acquire any hotel properties during the six months ended June 30, 2021.

Asset Sales

In May 2022, the GIC Joint Venture completed the sale of a 169-guestroom Hilton Garden Inn San Francisco Airport North in San Francisco, CA for a gross selling price of $75.0 million. The sale of this property resulted in a net gain of $20.5 million to the GIC Joint Venture during the three months ended June 30, 2022.

Assets Held for Sale

Assets Held for Sale at June 30, 2022 and December 31, 2021 include a land parcel in Flagstaff, AZ.