EX-99.1 14 d767140dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

 

 

LOGO

                    , 2015

Dear Inland American Real Estate Trust, Inc. Stockholder:

Over the past 18 months, Inland American Real Estate Trust, Inc. (“Inland American,” “we” or “our”) has been implementing its long-term strategy of focusing our portfolio into three asset classes – lodging, multi-tenant retail and student housing. By tailoring, expanding and refining these three components of our portfolio, our goals were to enhance long-term stockholder value and position Inland American to explore various strategic transactions designed to provide liquidity events for our stockholders. Inland American has achieved several important milestones in its efforts to enhance stockholder value and create liquidity for our stockholders:

 

    In August 2013, we announced, and subsequently closed, two large transactions involving the sale of our net lease assets and conventional multi-family assets for approximately $2.5 billion.

 

    In February 2014, stockholders approved important charter changes, resulting in increased flexibility for our board of directors to execute its strategy.

 

    In March 2014, Inland American continued to evolve with the signing of our self-management agreements and the $395 million modified “Dutch Auction” tender offer. Both events were important milestones in the history of Inland American and were designed to be accretive to existing stockholders.

 

    In November 2014, we sold 52 suburban select service hotels for approximately $1.1 billion, resulting in net proceeds of approximately $480 million after prepayment of indebtedness and related costs.

We are pleased to announce yet another important milestone for Inland American and inform you that the board of directors of Inland American has authorized the pro rata distribution of 95% of the outstanding shares of common stock of Xenia Hotels & Resorts, Inc. (“Xenia”), a wholly-owned subsidiary of Inland American, to Inland American stockholders. Upon completion of the separation and distribution from Inland American, Xenia will be an independent, self-advised and self-administered, publicly-traded REIT that invests primarily in premium full service, lifestyle and urban upscale hotels, with a focus on top 25 U.S. lodging markets (as defined by STR. Inc.) as well as key leisure destinations in the United States. Upon completion of the separation and distribution, Xenia will own 46 hotels, comprising 12,636 rooms, across 19 states and the District of Columbia, and a majority interest in two hotels under development. Xenia’s hotels are primarily operated by industry leaders such as Marriott®, Hilton®, Hyatt®, Starwood®, Kimpton®, Aston®, Fairmont® and Loews®, as well as leading independent management companies.

Inland American’s board of directors has determined upon careful review and consideration that Xenia’s separation from Inland American is in the best interests of Inland American. As a stand-alone company, we believe that Xenia will be well capitalized and well-positioned to deliver both internal growth through active and focused asset management of existing hotels and external growth through acquisitions that meet Xenia’s investment criteria. Additionally, as a publicly-traded REIT, Xenia will have access to the capital markets to issue equity or debt securities, and will have the flexibility to create a more diverse capital structure tailored to its strategic goals.

Xenia will be led by Jeffrey H. Donahue, as Chairman of the Board of Directors, and Marcel Verbaas, its President and Chief Executive Officer, and a member of Xenia’s board of directors. Mr. Donahue has extensive real estate industry experience and is a veteran public company director. Mr. Verbaas is a proven leader with


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strong business acumen and extensive industry knowledge. Since 2007, Mr. Verbaas and his team have overseen the entire lodging portfolio for Inland American and the acquisition of more than 50 hotels, including all but two of the properties in Xenia’s portfolio, and have been instrumental in executing a multi-year strategy of repositioning our lodging portfolio by recycling capital into hotels that meet Xenia’s investment criteria. Through this experience, Xenia’s senior management team has gained an in-depth knowledge of the hotels in Xenia’s portfolio and enhanced valuable, long-standing relationships with Xenia’s brand management companies, franchisors and third-party managers. Our board of directors is confident that Mr. Verbaas and his senior management team, who have an average tenure in the lodging industry of 26 years, have the requisite industry expertise and familiarity with Xenia’s lodging portfolio to lead Xenia as it transitions to an independent, lodging-focused, publicly-traded REIT.

Xenia has applied to list its common stock on the New York Stock Exchange under the symbol “XHR.” As a result, unlike shares of common stock of Inland American, Xenia’s common stock will be publicly tradable and you will be able to make your own investment decisions with respect to the shares of Xenia common stock that you own.

The pro rata distribution by Inland American of 95% of the outstanding shares of Xenia common stock will occur on             , 2015 by way of a taxable pro rata special distribution to Inland American stockholders of record on the record date of the distribution. Each Inland American stockholder will be entitled to receive one share of Xenia common stock for every eight shares of Inland American common stock held by such stockholder at the close of business on             , 2015, the record date of the distribution. The Xenia common stock will be issued in book-entry form only, which means that no physical share certificates will be issued. Following the distribution, you will own shares in both Inland American and Xenia. The number of Inland American shares you own will not change as a result of this distribution. Stockholder approval of the distribution is not required, and you will not be required to make any payment, or to surrender or exchange your shares of Inland American common stock or take any other action to receive your shares of Xenia common stock on the distribution date. Immediately following the distribution, Inland American will continue to own approximately 5% of the outstanding shares of common stock of Xenia.

The information statement, which is being mailed to all holders of Inland American common stock on the record date for the distribution, describes the distribution in detail and contains important information about Xenia, its business, financial condition and operations and risks related to its business. The information statement also explains how you will receive your shares of Xenia common stock. We urge you to read the entire information statement carefully.

On behalf of the board of directors, the senior management team and the employees of Inland American, I want to thank you for your continued support of Inland American. We look forward to this next chapter in Inland American’s history and to your future support of Xenia.

 

Sincerely,

LOGO

Thomas P. McGuinness

President and Chief Executive Officer,

Inland American Real Estate Trust, Inc.


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LOGO

                    , 2015

Dear Future Xenia Hotels & Resorts, Inc. Stockholder:

It is our pleasure to welcome you as a stockholder of our company, Xenia Hotels & Resorts, Inc. (“Xenia”). Our company is a self-advised and self-administered REIT that invests primarily in premium full service, lifestyle and urban upscale hotels, with a focus on the top 25 U.S. lodging markets (as defined by STR. Inc.) as well as key leisure destinations in the United States. Upon completion of the separation and distribution, Xenia will own a portfolio of 46 hotels, comprising 12,636 rooms, across 19 states and the District of Columbia, and a majority interest in two hotels under development. Our hotels are primarily operated by industry leaders such as Marriott®, Hilton®, Hyatt®, Starwood®, Kimpton®, Aston®, Fairmont® and Loews®, as well as leading independent management companies.

We own and pursue hotels in the upscale, upper upscale and luxury segments that are affiliated with premium, leading brands, as we believe that these segments yield attractive risk-adjusted returns. Within these segments, we focus on hotels that will provide guests with a distinctive lodging experience, tailored to reflect local market environments rather than hotels that are heavily dependent on conventions and group business. We also seek properties that exhibit an opportunity for us to enhance operating performance through aggressive asset management and targeted capital investment. By balancing our portfolio between premium full service, lifestyle and urban upscale hotels with these characteristics, we believe we are able to achieve strong cash flows and attractive returns.

We believe that the current market environment presents attractive opportunities for us to acquire additional hotels with significant upside potential that are compatible with our investment strategy. We also believe that current lodging market fundamentals provide meaningful opportunities for revenue and Adjusted EBITDA growth at our existing hotels. We intend to enhance the value of our existing hotels through focused asset management and targeted renovation projects. We believe that by pursuing this strategy, we will strengthen our position as a leading owner of hotel properties across our targeted segments. We believe that our senior management team’s overall lodging experience and proven track record, as well as its in-depth knowledge of our hotels and long-standing and extensive relationships within the lodging industry, will enable us to successfully execute on our business strategy to earn returns in excess of our cost of capital and create long-term value for our stockholders.

As a stand-alone publicly-traded company, we believe that Xenia will be well capitalized and well-positioned to deliver both internal growth through active and focused asset management of existing hotels and external growth through acquisitions that meet our investment criteria. Additionally, our separation from Inland American will enable our dedicated management team to focus solely on our premium full service, lifestyle and urban upscale hotel portfolio and make decisions solely based on our business objectives and strategic goals. As a pure play lodging company, we believe we will be well-positioned to grow our business through operational flexibility, efficient deployment of resources and quick decision-making based solely on the needs of our business. As a publicly-traded REIT, we will have direct access to the capital markets to issue equity or debt securities, and will have the flexibility to create a more diverse capital structure tailored to our strategic goals. Additionally, our common stock, and units of our operating partnership, will be able to be used to facilitate our growth through acquisitions and strategic partnerships after the distribution and may become an important acquisition currency.

Xenia has applied to list its common stock on The New York Stock Exchange under the symbol “XHR.” As a result, shares of Xenia’s common stock will be publicly tradable and you will be able to make your own investment decisions with respect to the shares of common stock of Xenia that you own.

We invite you to learn more about Xenia by reviewing the enclosed information statement. We urge you to read the information statement carefully as it describes the distribution in detail and contains important information about Xenia, our business, financial condition and operations and risks related to our business. The


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information statement also explains how you will receive your shares of Xenia common stock. We look forward to our future and to your support as a stockholder of Xenia.

 

Sincerely,

LOGO

Marcel Verbaas

President and Chief Executive Officer,

Xenia Hotels & Resorts, Inc.


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Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED JANUARY 9, 2015

 

 

INFORMATION STATEMENT

Common Stock

Xenia Hotels & Resorts, Inc.

 

 

This information statement is being furnished in connection with the taxable distribution by Inland American Real Estate Trust, Inc., or Inland American, a Maryland corporation that has elected to be taxed, and currently qualifies, as a real estate investment trust, or REIT, for U.S. federal income tax purposes, to its stockholders of 95% of the outstanding shares of common stock of Xenia Hotels & Resorts, Inc. (“Xenia”). Inland American currently owns 100% of the outstanding shares of common stock of Xenia. Xenia holds, or will hold, directly or indirectly, a portfolio of 46 premium full service, lifestyle and urban upscale hotels and the majority interest in two hotels under development. To implement the distribution, Inland American will distribute 95% of the outstanding shares of common stock of Xenia on a pro rata basis to existing stockholders of Inland American.

For every eight shares of common stock of Inland American held of record by you as of the close of business on             , 2015, or the distribution record date, you will receive one share of our common stock. We expect our common stock will be distributed by Inland American to you on or about             , 2015, or the distribution date.

No vote of Inland American’s stockholders is required in connection with the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send us a proxy, in connection with the distribution. You will not be required to pay any consideration or to exchange or surrender your existing shares of common stock of Inland American or take any other action to receive our common stock on the distribution date to which you are entitled.

There is no current trading market for our common stock. We have applied to list our common stock on The New York Stock Exchange (“NYSE”) under the symbol “XHR”, and expect trading of our common stock on the NYSE will begin on the first trading day following the completion of the distribution.

We intend to elect to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year that commenced on January 5, 2015. To assist us in qualifying as a REIT, among other purposes, stockholders are generally restricted from owning more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding shares of any class or series of our capital stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements.

 

 

In reviewing the information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 39.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

This Information Statement was first mailed to Inland American stockholders on or about             , 2015.

                    , 2015


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TABLE OF CONTENTS

 

MARKET AND INDUSTRY DATA

     i  

TRADEMARKS, SERVICE MARKS AND TRADENAMES

     i  

DISCLAIMER

     ii  

BASIS OF PRESENTATION

     ii  

CERTAIN DEFINED TERMS

     iv  

SUMMARY

     1  

RISK FACTORS

     39   

FORWARD-LOOKING STATEMENTS

     73   

OUR SEPARATION FROM INLAND AMERICAN

     75   

DISTRIBUTION POLICY

     85   

CAPITALIZATION

     86   

SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA

     88   

UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

     91   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     100  

INDUSTRY

     135  

BUSINESS AND PROPERTIES

     139  

OUR PRINCIPAL AGREEMENTS

     156  

MANAGEMENT

     161  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     185  

INVESTMENT POLICIES AND POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

     191   

THE OPERATING PARTNERSHIP AND THE PARTNERSHIP AGREEMENT

     193  

PRINCIPAL STOCKHOLDERS

     197  

DESCRIPTION OF INDEBTEDNESS

     201   

DESCRIPTION OF CAPITAL STOCK

     204   

CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

     210   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     216   

WHERE YOU CAN FIND MORE INFORMATION

     243   

INDEX TO FINANCIAL STATEMENTS

     F-1  

MARKET AND INDUSTRY DATA

The market data and certain other statistical information used throughout this information statement are based on independent industry publications, government publications or other published independent sources. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and there is no assurance that any of the projected amounts will be achieved. We believe that the surveys and market research others have performed are reliable, but we have not independently verified this information. STR. Inc. (“STR”), PKF Hospitality Research, LLC (“PKF-HR”) and Lodging Econometrics, Inc. (“Lodging Econometrics”) are the primary sources for third-party market data and industry statistics and forecasts. STR does not guarantee the performance of any company about which it collects and provides data. The reproduction of STR’s data without their written permission is strictly prohibited. Nothing in the STR, PKF-HR or Lodging Econometrics data should be construed as advice. Some data is also based on our good faith estimates.

TRADEMARKS, SERVICE MARKS AND TRADENAMES

This information statement contains registered trademarks that are the exclusive property of their respective owners, which are companies other than us, including Marriott International, Inc., Hilton Worldwide Inc., Hyatt Hotels Corporation, Starwood Hotels and Resorts Worldwide, Inc., The Kimpton Hotel & Restaurant Group Inc.,

 

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Aston Hotels & Resorts LLC, Fairmont Hotels & Resorts and Loews Hotels, or their respective parents, subsidiaries or affiliates (“Brand Companies”). In the event that any of our management agreements or franchise agreements with the Brand Companies are terminated for any reason, the use of all applicable trademarks and service marks owned by the Brand Companies will cease at the hotel where the management agreement or franchise agreement was terminated; all signs and materials bearing the marks and other indicia connecting the hotel to the Brand Companies will be removed (at the hotel’s or our expense).

DISCLAIMER

None of the Brand Companies or their respective directors, officers, agents or employees are issuers of the shares described herein or had responsibility for the creation or contents of this information statement. None of the Brand Companies or their respective directors, officers, agents or employees make any representation or warranty as to the accuracy, adequacy or completeness of any of the following information, including any financial information and any projections of future performance. The Brand Companies do not have an exclusive relationship with us and will continue to be engaged in other business ventures, including the acquisition, development, construction, ownership or operation of lodging, residential and vacation ownership properties, which are or may become competitive with the properties held by us.

BASIS OF PRESENTATION

Prior to and in connection with our separation from Inland American, we will effect the transactions (the “Reorganization Transactions”) described under “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization.” We refer in this Information Statement to all of the hotels owned by Xenia from time to time and prior to the Reorganization Transactions and the sale of the Suburban Select Service Portfolio (defined below) as the “Prior Combined Portfolio.” As of September 30, 2014, the Prior Combined Portfolio consisted of:

 

    46 premium full service, lifestyle and urban upscale hotels and a majority interest in two hotels under development (collectively, the “Xenia Portfolio”);

 

    one hotel being marketed for sale; and

 

    52 suburban select service hotels (the “Suburban Select Service Portfolio”), classified as held for sale with the related results from operations reported as discontinued operations, as described below.

In October 2014, as part of the Reorganization Transactions, the hotel being marketed for sale was transferred by the Company to a separate, wholly-owned subsidiary of Inland American. This hotel was subsequently sold by Inland American to an unaffiliated third party on December 31, 2014. For more detail regarding the Reorganization Transactions, see “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization.”

The Suburban Select Service Portfolio was sold on November 17, 2014 to unaffiliated third party purchasers for approximately $1.1 billion, resulting in net proceeds to Inland American of approximately $480 million after prepayment of certain indebtedness and related costs. Since September 17, 2014, the date of the definitive asset purchase agreement, the Suburban Select Service Portfolio has been classified as held for sale, and its operating activity has been reflected in discontinued operations. Following the completion of the sale of the Suburban Select Service Portfolio, the Suburban Select Service Portfolio is no longer owned or asset managed by the Company. None of the proceeds from the sale of the Suburban Select Service Portfolio were retained by Xenia.

 

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Unless otherwise indicated or the context otherwise requires, all information herein reflects the consummation of the Reorganization Transactions, the sale of the Suburban Select Service Portfolio and the completion of our separation from Inland American, which will occur on the distribution date. References herein to “we,” “our,” “us” and the “Company” refer to Xenia Hotels & Resorts, Inc. and its consolidated subsidiaries, including XHR LP, a Delaware limited partnership, which we refer to as our “operating partnership,” and references to “Xenia Hotels & Resorts, Inc.” refer only to Xenia Hotels & Resorts, Inc., exclusive of its subsidiaries, in each case giving effect to the Reorganization Transactions.

Additionally, unless otherwise indicated or the context otherwise requires, all information in this information statement gives effect to the filing of our Articles of Amendment and Restatement and the effectiveness of our Amended and Restated Bylaws, which will occur prior to the completion of our separation from Inland American.

Presentation of historical operating and non-financial data and pro forma financial information

Unless otherwise indicated or the context otherwise requires, (i) operating and non-financial data, including occupancy (as defined below), ADR (as defined below), RevPAR (as defined below), number of hotels, number of rooms and Adjusted EBITDA, disclosed in the sections of this information statement other than the Financial Statement Sections (as defined below) and (ii) pro forma financial information in this information statement:

 

    reflect the business and operations of the Company after the consummation of the Reorganization Transactions and immediately following the completion of the separation of the Company from Inland American, when we will own solely the Xenia Portfolio;

 

    exclude the Suburban Select Service Portfolio to the extent it is reflected as held for sale on the Company’s balance sheet as of September 30, 2014;

 

    exclude one hotel sold on May 30, 2014, one hotel sold on August 28, 2014 and one hotel sold on December 31, 2014;

 

    with respect to each hotel included in the Xenia Portfolio acquired during 2013 or 2014, give effect to such acquisition as if such acquisition had been consummated on January 1, 2013;

 

    reflect the issuance of 125 shares of preferred stock of the Company, designated as 12.5% Series A Cumulative Non-Voting Preferred Stock, $0.01 par value per share, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), in a private placement to approximately 125 investors who qualify as “accredited investors” (as that term is defined in Rule 501(a) of Regulation D of the Securities Act) for an aggregate purchase price of $125,000, which we issued to facilitate our ability to qualify as a REIT in connection with a potential section 336(e) election under the Internal Revenue Code of 1986, as amended (the “Code”), as described in “Our Separation From Inland American—Certain Material U.S. Federal Income Tax Consequences of the Separation—Tax Classification of the Separation in General”;

 

    reflect the capital contribution from Inland American of $125.0 million prior to the completion of our separation from Inland American (the “Capital Contribution”);

 

    reflect the repayment of approximately $84.0 million of borrowings outstanding under existing mortgage indebtedness, funded by Inland American;

 

    reflect an additional capital contribution of $16.0 million, all of which the Company intends to use to paydown existing mortgage indebtedness in 2015;

 

    reflect a non-cash capital contribution of $86.8 million to settle the Company’s allocated share of Inland American’s unsecured credit facility as of September 30, 2014;

 

    reflect the Company’s entry into the intended new $400 million unsecured revolving credit facility;

 

    reflect the issuance of 113,396,997 shares of our common stock to Inland American pursuant to a stock dividend effectuated prior to the distribution;

 

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    reflect the distribution of 107,728,098 shares of our common stock to holders of Inland American common stock based upon the number of Inland American shares outstanding on                     , 2015 and 5,669,899 shares retained by Inland American; and

 

    reflect certain other adjustments as described in “Unaudited Pro Forma Combined Consolidated Financial Statements.”

Presentation of combined consolidated financial information and certain operating and non-financial data

Unless otherwise indicated or the context otherwise requires, (i) the historical financial data (excluding all pro forma financial data) in this information statement and (ii) the operating and non-financial data (but excluding all related data prepared on a pro forma basis), including occupancy, ADR, RevPAR, number of hotels, number of rooms, FFO (as defined below), Adjusted FFO (as defined below) and Adjusted EBITDA, disclosed in “Summary Historical and Pro Forma Combined Consolidated Financial and Operating Data,” “Selected Historical Combined Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (excluding all pro forma financial data) (collectively, the “Financial Statement Sections”) reflects the combined and consolidated business and operations of the Company prior to consummation of the Reorganization Transactions and the completion of the Company’s separation from Inland American, reflecting ownership of the Prior Combined Portfolio, which, among other things, classifies the Suburban Select Service Portfolio as held for sale with the related results from operations reported as discontinued operations.

CERTAIN DEFINED TERMS

Except where the context suggests otherwise, we define certain terms in this information statement as follows:

 

    “ADR” or “average daily rate” means hotel room revenue divided by total number of rooms sold in a given period;

 

    “Adjusted FFO” means FFO (as defined below), adjusted for certain items such as hotel property acquisition and pursuit costs and other expenses we believe do not represent recurring operations;

 

    “Aston,” “Fairmont,” “Hilton,” “Hyatt,” “Kimpton,” “Loews,” “Marriott,” and “Starwood” mean Aston Hotels & Resorts LLC, Fairmont Hotels & Resorts, Hilton Worldwide Inc., Hyatt Hotels Corporation, The Kimpton Hotel & Restaurant Group Inc., Loews Hotels, Marriott International, Inc., and Starwood Hotels and Resorts Worldwide, Inc., respectively, as well as their respective parents, subsidiaries or affiliates;

 

    “CAGR” means compound annual growth rate;

 

    “FFO” means a measure that reflects net income or loss (calculated in accordance with GAAP), excluding real estate depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets, the cumulative effect of changes in accounting principles and adjustments for unconsolidated partnerships and joint ventures;

 

    “Inland American” means Inland American Real Estate Trust, Inc., a Maryland corporation that has elected to be taxed and currently qualifies, as a REIT, and that owns 100% of the outstanding shares of common stock of the Company prior to giving effect to the separation, and, as the context may require, its consolidated subsidiaries other than us;

 

    a “lifestyle” hotel refers to an innovative hotel with a focus on providing a unique and individualized guest experience in a smaller footprint by combining traditional hotel services with modern technologies and placing an emphasis on local influence;

 

    a “luxury” hotel refers to a luxury hotel as defined by STR;

 

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    “occupancy” means the total number of rooms sold in a given period divided by the total number of rooms available at a hotel or group of hotels;

 

    a “premium full service hotel” refers to a hotel defined as “upper upscale” or “luxury” by STR;

 

    “RevPAR” or “revenue per available room” means hotel room revenue divided by room nights available to guests for a given period, and does not include non-room revenues such as food and beverage revenue or other operating revenues;

 

    the “Seven Major Markets” means the markets in and around New York City, New York; Chicago, Illinois; Washington, DC; San Francisco / San Mateo, California; San Diego, California; Boston, Massachusetts; and Los Angeles / Long Beach, California, which represent the seven largest markets based on number of owned hotel rooms among all other publically-traded U.S. hotel REITs included in the FTSE NAREIT US Real Estate Index;

 

    “Top 25 Markets” refers to the top 25 U.S. lodging markets as defined by STR;

 

    “TRS” refers to a taxable REIT subsidiary under the Code. “Our TRS” refers to XHR Holding, Inc., a wholly-owned subsidiary of our operating partnership that will elect to be a TRS of ours;

 

    “TRS lessees” refers to the direct and indirect wholly-owned subsidiaries of our TRS;

 

    an “upper midscale” hotel refers to an upper midscale hotel as defined by STR;

 

    an “upper upscale” hotel refers to an upper upscale hotel as defined by STR;

 

    an “upscale” hotel refers to an upscale hotel as defined by STR; and

 

    an “urban upscale” hotel refers to a hotel located in an urban or similar high-density commercial area, such as a central business district, and defined as “upscale” or “upper midscale” by STR.

 

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SUMMARY

This summary highlights some of the information in this information statement relating to our Company, our separation from Inland American and the distribution of our common stock by Inland American to its stockholders. For a more complete understanding of our business and the separation and distribution, you should read carefully the more detailed information set forth under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Our Separation from Inland American” and the other information included in this information statement.

 

 

Overview

We are a self-advised and self-administered REIT that invests primarily in premium full service, lifestyle and urban upscale hotels, with a focus on the Top 25 Markets as well as key leisure destinations in the United States. As of September 30, 2014, we owned 46 hotels, comprising 12,636 rooms, across 19 states and the District of Columbia, and had a majority interest in two hotels under development. Our hotels are primarily operated by industry leaders such as Marriott, Hilton, Hyatt, Starwood, Kimpton, Aston, Fairmont and Loews, as well as leading independent management companies, under the brands listed in the following table:(1)

 

Brand Affiliation

 

Number

of Hotels

    

Number
of Rooms

      

Percentage
of Total Rooms

 

Marriott

         

Autograph Collection(2)

    3         437           3.5

Courtyard by Marriott

    4         630           5.0

Marriott

    9         3,099           24.5

Renaissance

    2         1,014           8.0

Residence Inn

    3         637           5.0
 

 

 

    

 

 

      

 

 

 

Subtotal

    21         5,817           46.0

Hilton

         

DoubleTree

    1         220           1.7

Embassy Suites

    1         223           1.8

Hampton Inn

    2         264           2.1

Hilton

    3         669           5.3

Hilton Garden Inn

    2         478           3.8

Homewood Suites

    1         162           1.3
 

 

 

    

 

 

      

 

 

 

Subtotal

    10         2,016           16.0

Hyatt

         

Andaz

    3         451           3.6

Hyatt

    1         118           0.9

Hyatt Regency

    2         1,154           9.1
 

 

 

    

 

 

      

 

 

 

Subtotal

    6         1,723           13.6

Kimpton

         

Lorien

    1         107           0.8

Monaco

    3         605           4.8
 

 

 

    

 

 

      

 

 

 

Subtotal

    4         712           5.6

Starwood

         

Westin

    2         893           7.1
 

 

 

    

 

 

      

 

 

 

Subtotal

    2         893           7.1

Aston

    1         645           5.1

Fairmont

    1         545           4.3

Loews

    1         285           2.3
 

 

 

    

 

 

      

 

 

 

Total

    46         12,636           100.0
 

 

 

    

 

 

      

 

 

 

 

 

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(1) This table reflects only the hotels in the Xenia Portfolio, excluding our two hotels under development, as of September 30, 2014. See “Basis of Presentation.”
(2) Our two hotels under development are Autograph Collection hotels, which will have a total of 150 rooms.

The following table sets forth certain information about our portfolio of hotels on a pro forma basis:

 

     Nine Month
Period Ended
September 30,
    Year Ended December 31,  
     2014     2013     2012     2011  

Statistical Data:

        

Number of Hotels(1)

     46        45        31        24   

Number of Rooms(1)

     12,636        11,991        8,688        6,063   

Occupancy(2)

     78.1     75.2     71.5     71.1

ADR(2)

   $ 176.91      $ 167.20      $ 151.84      $ 147.71   

RevPAR(2)

   $ 138.24      $ 125.73      $ 108.54      $ 104.99   

 

(1) Includes only the hotels in the Xenia Portfolio, excluding our two hotels under development, as of the end of the applicable period. See “Basis of Presentation.”
(2) Includes full-year (or full-period) data for any hotel acquired during the applicable period by including applicable data for such hotels while they were under prior ownership. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for a presentation of such statistics from the date of acquisition of such hotels. For only those hotels operated by Marriott, our historical annual operating results represented here from 2011 to 2013 include a 52-53 week fiscal calendar used by Marriott at that time.

On a pro forma basis, for the nine months ended September 30, 2014 and the year ended December 31, 2013, we generated pro forma revenues of $691.1 million and $861.1 million, respectively, pro forma Adjusted EBITDA of $195.3 million and $233.9 million, respectively, and net income attributable to the Company of $37.5 million and $14.2 million, respectively. In addition, for the nine months ended September 30, 2014 and the year ended December 31, 2013, 75.9% and 76.1% of our pro forma revenues were derived from hotels located in the Top 25 Markets and key leisure destinations. For our definition of Adjusted EBITDA and why we present it as well as a reconciliation of Adjusted EBITDA to net income attributable to Company, the most directly comparable GAAP financial measure, see “Summary Historical and Pro Forma Combined Consolidated Financial and Operating Data.” See also “Basis of Presentation.”

We plan to grow our business through a differentiated acquisition strategy, aggressive asset management and capital investment in our properties. We primarily target markets and sub-markets with particular positive characteristics, such as multiple demand generators, favorable supply and demand dynamics and attractive projected RevPAR growth, with a focus on the Top 25 Markets and key leisure destinations. While we expect that most lodging markets will benefit from improvement in rates and occupancy in the intermediate term, we believe some will enjoy stronger improvements in fundamentals and deliver greater returns-on-investment on a risk-adjusted basis than others. We believe that since the recent financial crisis, investors in hotels, and in particular publicly-traded U.S. hotel REITs, have had an increasing focus on investing in properties located in the Seven Major Markets, which we believe has resulted in higher asset prices in those markets than in the Top 25 Markets despite the latter having comparable, and in some cases, stronger, underlying fundamentals. According to PKF-HR, the Top 25 Markets experienced lower supply growth than the Seven Major Markets from 2009 to 2013, and this trend is expected to continue through 2016 despite both sets of markets experiencing comparable demand growth, resulting in a more attractive projected supply / demand dynamic for the Top 25 Markets. As such, as compared to publicly-traded U.S. hotel REITs focused on the Seven Major Markets, our strategy allows us to acquire properties at attractive valuations in markets that have similar or better RevPAR growth expectations.

 

 

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We own and pursue hotels in the upscale, upper upscale and luxury segments that are affiliated with premium, leading brands, as we believe that these segments yield attractive risk-adjusted returns. Within these segments, we focus on hotels that will provide guests with a distinctive lodging experience, tailored to reflect local market environments rather than hotels that are heavily dependent on conventions and group business. We also seek properties that exhibit an opportunity for us to enhance operating performance through aggressive asset management and targeted capital investment. By balancing our portfolio between premium full service, lifestyle and urban upscale hotels with these characteristics, we believe we are able to achieve strong cash flows and attractive returns. Examples of how we have recently executed our strategy include several recent acquisitions, such as the Andaz San Diego, the Residence Inn Denver City Center, the Westin Galleria Houston and the Westin Oaks Houston at The Galleria and the Hyatt Key West Resort & Spa.

 

    Andaz San Diego: In March 2013, we acquired the Andaz San Diego, which made us the first REIT to own Hyatt’s recently introduced lifestyle brand, Andaz. We believe this prominent boutique hotel located within San Diego’s vibrant GasLamp Quarter presented an attractive investment opportunity. The hotel had generated strong revenues since opening in 2009, with further upside from a number of specific opportunities where we believed our asset management team could significantly improve operating cash flow through an aggressive reorganization of the business offerings and expense structure. We are working with Hyatt to implement these improvements.

 

    Residence Inn Denver City Center: In April 2013, we acquired the Residence Inn Denver City Center, which is a modern, high rise urban upscale hotel in the heart of Downtown Denver. The extended stay and transient business mix, combined with strong average rates and an efficient staffing model, support strong margins at this hotel. Additionally, the hotel was developed as a mixed use commercial building with two leased street level retail outlets and significant excess parking within the tower that provides stable monthly income from local corporate parking demand.

 

    Westin Galleria Houston and Westin Oaks Houston at The Galleria: The Westin Galleria Houston and the Westin Oaks Houston at The Galleria hotels, which we acquired in August 2013, are two premium full service hotels directly attached at opposite ends of The Galleria Mall in West Houston and operated as one of the premier meeting complexes in the strong Houston market. We acquired the two hotels at a meaningful discount to estimated replacement cost in the Houston Galleria submarket which has strong demand and limited hotel development sites. We identified what we believe to be significant opportunities to improve performance and increase value through aggressive revenue management and improving operational efficiencies.

 

    Hyatt Key West Resort & Spa: Our acquisition of the Hyatt Key West Resort & Spa in November 2013 was an attractive opportunity to gain entry into a market with extremely high barriers to entry and robust RevPAR growth. The compact, 118-room resort is ideally located on the water at the end of Duval Street and appeals to travelers through its strong brand affiliation and unique property characteristics.

Since 2010, we have acquired 28 of the hotels in the Xenia Portfolio, a total of 8,562 rooms, for an aggregate purchase price of approximately $2.0 billion. Additionally, since 2008, we have invested a total of approximately $209 million during our ownership period in capital expenditures to competitively position our portfolio to increase revenues as well as to keep our hotels well maintained. Our in-house project management team, currently consisting of eight individuals, manages all of our capital expenditure projects, which we believe provides us with a competitive advantage.

We believe that the current market environment presents attractive opportunities for us to acquire additional hotels with significant upside potential that are compatible with our investment strategy. We also believe that current lodging market fundamentals provide meaningful opportunities for revenue and Adjusted EBITDA growth at our existing hotels. We intend to enhance the value of our existing hotels through focused asset

 

 

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management and targeted renovation projects. We believe that by pursuing this strategy, we will strengthen our position as a leading owner of hotel properties across our targeted segments. We believe that our senior management team’s overall lodging experience and proven track record, as well as its in-depth knowledge of our hotels and long-standing and extensive relationships within the lodging industry, will enable us to successfully execute on our business strategy to earn returns in excess of our cost of capital and create long-term value for our stockholders.

We intend to elect to be taxed as, and to operate in a manner that will allow us to qualify as, a REIT for U.S. federal income tax purposes beginning with our short taxable year that commenced on January 5, 2015. See “Summary—Our Tax Status” and “Material U.S. Federal Income Tax Consequences.” To satisfy the requirements for qualification as a REIT, we lease our hotels to our TRS lessees, which are owned by our TRS. Our TRS will be subject to U.S. federal, state and local income tax.

Reasons for the Separation

Upon careful review and consideration in accordance with the applicable standard of review under Maryland law, Inland American’s board of directors determined that our separation from Inland American is in the best interests of Inland American. The board’s determination was based on a number of factors, including those set forth below.

 

    Create two separate, focused companies executing distinct business strategies. Historically, Inland American has focused on acquiring and developing a diversified portfolio of commercial real estate located in a broad range of geographic regions throughout the United States. As a result, Inland American’s investors have had exposure to a diversified portfolio across several different real estate asset classes, such as multi-tenant retail, lodging, student housing, net lease, office, industrial, and multi-family. Its lodging assets have been managed by a dedicated management team and held in a focused subsidiary since we were formed in 2007. Over the past two years, Inland American has been focusing its diversified portfolio into three specific asset classes – multi-tenant retail, lodging and student housing. By separating its premium full service, lifestyle and urban upscale hotel portfolio into a standalone hotel company, investors will be invested in two separate platforms with dedicated and focused management teams. The Suburban Select Service Portfolio was sold on November 17, 2014 to unaffiliated third party purchasers for approximately $1.1 billion.

 

    Allow Inland American’s management to focus on its retained asset classes, while enabling our dedicated management to focus solely on Xenia’s premium full service, lifestyle and urban upscale hotel portfolio and make decisions solely based on Xenia’s business objectives and strategic plan. The separation of the premium full service, lifestyle and urban upscale hotel portfolio from Inland American will allow Inland American’s management to solely focus on its multi-tenant retail and student housing asset classes and the needs of these segments. Similarly, the separation will enable our dedicated management team to focus solely on Xenia’s premium full service, lifestyle and urban upscale hotel portfolio and make decisions solely based on our business objectives and strategic goals. As a pure play lodging company, we believe that we will be well-positioned to grow our business through operational flexibility, efficient deployment of resources and quick decision-making based solely on the needs of our business.

 

    Market recognition of the value of our business. As a stand-alone company, we will be focused solely on premium full service, lifestyle and urban upscale hotels, making us an attractive investment opportunity for REIT investors looking for exposure to this asset class. We will also benefit from having the ability to use shares of our common stock or common units of limited partnership interest in our operating partnership (“OP Units”) as acquisition currency, which will improve our competitive positioning as we grow.

 

 

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    Provide liquidity to Inland American stockholders. Unlike shares of common stock of Inland American, shares of our common stock are expected to be listed on the New York Stock Exchange (“NYSE”) and will be publicly tradeable. As a result, by distributing shares of our common stock to Inland American’s existing stockholders, such stockholders will be able to make their own investment decisions with respect to the shares of common stock that they own. Additionally, as a result of having a publicly traded market for our stock, new investors will have the opportunity to invest in our company.

 

    More efficient capital allocation and direct access to capital markets. As a separate public company, we will have direct access to the capital markets to issue equity or debt securities, and will have the flexibility to create a more diverse capital structure tailored to our strategic goals and designed to maximize stockholder value. Additionally, our common stock, and possibly our OP Units, will be able to be used to facilitate our growth through acquisitions and strategic partnerships after the distribution and may become an important acquisition currency.

The anticipated benefits of the separation are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated, or at all. In the event that the separation does not result in such benefits, the costs associated with the separation could have a material adverse effect on our business and are not quantifiable. As part of Inland American, we have enjoyed certain benefits from Inland American’s purchasing power and borrowing leverage, and have also had access to Inland American’s balance sheet and capital. Following our separation from Inland American, we will be a smaller and less diversified company than Inland American, and we will not have access to financial and other resources comparable to those of Inland American prior to the separation. As a separate, stand-alone company, we may be unable to obtain debt or goods, technology and services at prices and on terms as favorable as those available to us prior to the separation. For more information about the risks associated with the separation, see “Risk Factors – Risks Related to Our Relationship with Inland American and the Separation.”

Our Industry

We believe that recent favorable trends in U.S. lodging industry fundamentals coupled with industry experts’ positive outlook provide an attractive backdrop for the growth of our business in the coming years.

The U.S. lodging industry constitutes a substantial portion of the domestic economy, having generated approximately $334 billion in revenues in 2013, according to STR. As of September 2014, there were over 53,000 hotels and 5 million hotel rooms in the United States according to Lodging Econometrics.

Historically, the performance of the lodging industry has been driven by lodging demand, which is partially a function of macroeconomic fundamentals including employment, corporate profits and consumer confidence. U.S. GDP is projected to grow at a rate of 2.2% in 2014, 3.1% in 2015 and 3.0% in 2016, according to the International Monetary Fund. Considering the strong relationship between room demand and macroeconomic conditions, we believe our business and the lodging industry broadly are well positioned for growth.

 

 

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According to PKF-HR, U.S. lodging RevPAR is expected to grow 8.6% in 2014, 7.1% in 2015 and 5.9% in 2016, supported by favorable supply and demand characteristics. This compares to a RevPAR CAGR of 3.0% over the past 25 years, according to STR. According to STR, lodging demand, as measured by number of occupied hotel rooms, has grown at a CAGR of 2.4% between 2011 and 2013, compared to hotel supply, which has grown at a CAGR of 0.6% over the same period. PKF-HR further projects strong RevPAR growth across our targeted chain scale segments, as indicated in the chart below:

 

RevPAR Growth By Chain Scale

 

LOGO

Source: PKF-HR

Given the positive broader macroeconomic trends, favorable supply and demand dynamics in the overall U.S. lodging industry and strong expected performance of our target sub-markets, we believe our business is poised to generate strong economic performance in the coming years.

For more details, please see “Industry.”

 

 

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Our Competitive Strengths

We believe the following strengths will help us to achieve strong cash flows and attractive returns:

 

    High Quality Portfolio Operated Under Premium Brands. Substantially all of our hotels operate under premium brands affiliated with industry leaders such as Marriott, Hilton, Hyatt, Starwood, Kimpton, Aston, Fairmont and Loews and are located in urban or densely populated suburban markets that we believe have multiple demand generators and high barriers to entry. Additionally, our portfolio includes lifestyle hotels that seek to attract the next generation traveler (i.e., hotels that offer a distinctive lodging experience, both in terms of “destination” locations and in highly personalized service), such as our Andaz, Kimpton and Autograph Collection hotels. Lifestyle hotels are a fast growing segment in key urban markets that offer what we believe have attractive investment profiles. The following chart represents the brand affiliations of the Xenia Portfolio as of September 30, 2014:

Portfolio Breakdown by Brand Affiliation(1)

 

LOGO

 

  (1) Includes only the hotels in the Xenia Portfolio, excluding our two hotels under development, as of September 30, 2014. Percentages indicate percent of total rooms as of September 30, 2014. See “Basis of Presentation.”

We believe the quality of our portfolio is evidenced by its RevPAR and the amount by which its RevPAR exceeds the national average. For the year ended December 31, 2013 and the nine months ended September 30, 2014, our portfolio generated RevPAR of $125.73 and $138.24 respectively, representing multiples of 1.83x and 1.82x, respectively, of the national average for hotels of all chain scales, as reported by STR. As of September 30, 2014, our portfolio included five luxury hotels, 27 upper upscale hotels, and 12 upscale hotels (one of which was acquired in 2014). Additionally, our hotels are well maintained and competitively positioned, as we have invested an aggregate of $209 million during our ownership period in capital expenditures from January 1, 2008 through September 30, 2014 (excluding our two hotels under construction).

 

    Differentiated Market Strategy That Drives Attractive Growth. Our management team has implemented and executed a strategy of acquiring hotels primarily in the Top 25 Markets and key leisure destinations in the U.S., which has resulted in a diversified portfolio with a national footprint. As of September 30, 2014, we owned 46 hotels, comprising 12,636 rooms, across 19 states and the District of Columbia, and had a majority interest in two hotels under development. As depicted in the map below, the hotels in our portfolio are geographically diverse, and no one market and no individual hotel accounted for more than 13.7% or 6.4%, respectively, of our total pro forma revenue for the nine months ended September 30, 2014. As of September 30, 2014, our largest concentrations of hotels by room count per state were 24.2% in Texas and 19.1% in California.

 

 

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Portfolio Breakdown by Geography(1)

 

LOGO

 

  (1) Includes only the hotels in the Xenia Portfolio, including our two hotels under development, as of September 30, 2014. See “Basis of Presentation.”

We base our acquisition strategy on the Top 25 Markets rather than the Seven Major Markets because we believe the Top 25 Markets present more attractive risk-adjusted return potential, supported by favorable historical and projected supply and demand dynamics while generating higher projected RevPAR growth at attractive valuations.

 

Projected RevPAR CAGR

(2013-2016E)

 

LOGO

Source: PKF-HR

 

 

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As illustrated in the charts below, the Top 25 Markets are expected to experience lower supply growth compared to the Seven Major Markets through 2016. Though the Seven Major Markets are expected to generate greater demand growth through 2016, the lack of supply growth in the Top 25 Markets more than offsets the lower demand growth resulting in a more favorable supply / demand dynamic as measured by demand growth minus supply growth.

 

Projected Supply CAGR (2013-2016E)    Projected Demand CAGR (2013-2016E)   

Projected Demand CAGR Minus Projected Supply CAGR (2013-2016E)

 

LOGO    LOGO    LOGO

Source: PKF-HR

Since 2010, we have executed on this strategy by acquiring 28 of the hotels in the Xenia Portfolio for an aggregate purchase price of $1,953 million. The following table sets forth additional information regarding recent acquisitions:

 

Year

   Number
of Assets
     Price
($mm)(1)
 

2010

     3       $ 104   

2011

     3       $ 167   

2012

     7       $ 525   

2013

     14       $ 974   

2014

     1       $ 183   
  

 

 

    

 

 

 

Total

     28       $ 1,953   
  

 

 

    

 

 

 

 

  (1) Includes purchase price plus additional contingent consideration pursuant to the respective purchase and sale agreements.

 

    Attractive Cash Flow Characteristics. Our strategy focuses on driving strong current income and attractive operating margins, and each type of hotel in our portfolio has characteristics that lead to strong current cash flows. For example, because urban upscale hotels offer limited food outlets and other amenities, we can deliver a satisfying guest experience without the expense of staffing these lower-margin ancillary activities, thereby resulting in strong bottom line performance. Our lifestyle assets are generally characterized by smaller physical footprints, leading to lower cost bases, and higher RevPAR, in comparison to traditional full-service hotels in their respective markets. Our premium full-service hotels are designed to offer a wide variety of income streams, including restaurants, meeting facilities, parking facilities and ancillary opportunities, and we utilize sophisticated asset management techniques to continually monitor and seek to improve performance from every income stream at these hotels. This combination of factors among differing hotel types ultimately results in strong cash flow generation and growth profile across our portfolio. Further, our aggressive, focused asset management and project management strategies seek to identify opportunities to enhance revenue and improve hotel operating margins.

 

 

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    Strong and Flexible Balance Sheet with Capacity for Growth. Upon our separation from Inland American, we will be well-capitalized and moderately levered, with strong liquidity and access to multiple capital sources. As of September 30, 2014, we have pro forma net debt to pro forma annualized Adjusted EBITDA of 4.3x, which reflects the pro forma adjustments described in “Summary—Our Financing Strategy” and “Description of Indebtedness—Property-Level Debt for the Xenia Portfolio.” Concurrent with the listing of our common stock, we expect to have an unsecured revolving credit facility pursuant to which we may borrow up to $400 million, which we believe provides us liquidity and flexibility to execute our growth strategy and manage short-term cash flow needs. We also have a well-staggered debt maturity profile. Our flexible capital structure enables us to be opportunistic in making acquisitions and reinvesting in our portfolio and strategic in determining which capital sources to utilize.

 

    Experienced Management Team with Proven Track Record. Our senior management team, led by Marcel Verbaas, our President and Chief Executive Officer, has extensive experience in the lodging industry, including in asset management, acquisitions, dispositions, financing and renovations and repositioning of hotel properties over multiple lodging cycles, and a track record of executing on our business strategy and delivering strong results. Collectively, the eight members of our senior management team have an average tenure in the lodging industry of 26 years, including Mr. Verbaas with 20 years of lodging experience, Barry A.N. Bloom, Ph.D., our Executive Vice President and Chief Operating Officer, with 28 years of lodging experience, Andrew J. Welch, our Executive Vice President and Chief Financial Officer, with 23 years of lodging-related experience, and Philip A. Wade, our Senior Vice President and Chief Investment Officer, with 15 years of lodging experience. Through this experience, our senior management team has developed strong execution capabilities and in-depth knowledge of the hotels in our portfolio, and have built valuable, long-standing relationships with our brand management companies, franchisors and other third-party managers.

Business and Growth Strategies

Our objective is to invest primarily in premium full service, lifestyle and urban upscale hotels at valuations where we believe we can generate attractive returns on investment and long-term value appreciation and improve the value of our portfolio through aggressive asset management of our existing portfolio and future acquired hotels. We intend to pursue these objectives through the following investment and growth strategies:

 

    Pursue Differentiated Investment Strategy Across Targeted Markets. We intend to use our management team’s network of relationships in the lodging industry and our relationships with the 15 hotel management companies that currently manage assets in our portfolio, among others, to continue to source acquisition opportunities. When evaluating opportunities, we consider the following characteristics:

 

    Market Characteristics. Unlike many publicly-traded lodging REITs that we believe focus primarily on the Seven Major Markets, we seek opportunities across a range of urban and dense suburban areas, as well as key leisure destinations, in the United States. We believe that this strategy provides us with a broader range of opportunities and allows us to target markets and sub-markets with particular positive characteristics, such as multiple demand generators, favorable supply and demand dynamics and attractive projected RevPAR growth. Compared to the Seven Major Markets, we believe assets in the Top 25 Markets present more attractive investment opportunities considering the favorable supply and demand dynamics, higher RevPAR growth and attractive valuations.

 

   

Asset Characteristics. We generally pursue hotels in the upscale, upper upscale and luxury segments that are affiliated with leading premium brands, as we believe these segments yield attractive risk-adjusted returns. Further, PKF-HR projects strong RevPAR growth across these

 

 

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segments through 2016. Within these segments, we seek hotels that will provide guests with a distinctive lodging experience, tailored to reflect local market environments rather than invest in properties that are heavily dependent on conventions and group business. We seek properties with desirable locations within their markets, exceptional facilities and other competitive advantages that are hard to replicate. We also favor properties that can be purchased well below estimated replacement cost. We believe our focus on premium full service, lifestyle, and urban upscale assets allows us to seek appropriate investments that are well suited for specific markets.

 

    Operational and Structural Characteristics. We pursue both newly constructed assets that require limited capital investment as well as more mature and complex properties with opportunities for our dedicated asset and project management teams to create value through more active operational oversight and targeted capital expenditures. Additionally, we seek properties that are unencumbered by debt and that will not require joint venture ownership, allowing us maximum operational flexibility.

We believe that our multi-pronged approach to investing provides us the flexibility to pursue attractive opportunities whenever and wherever they are presented.

 

    Drive Growth through Proactive, Value-Added Asset Management, Project Management and Capital Allocation. We believe that investing in our properties and employing a proactive asset management approach designed to identify investment strategies will optimize internal growth opportunities. Our management team’s extensive industry experience across multiple brands and management companies and our integrated asset management and project management teams, enable us to identify and implement value-added strategies, prudently invest capital in our assets to optimize operating results and leverage best practices across our portfolio.

 

    Aggressive Asset Management Strategy Drives Performance. Our experienced asset management team focuses on driving property performance through revenue enhancement and cost containment efforts. Our ability to work with a wide variety of management and franchise companies provides us with the opportunity to benchmark performance across our portfolio in order to share best practices. While we do not operate our hotel properties directly, and under the terms of our hotel management agreements our ability to participate in operating decisions regarding our hotels is limited, we conduct regular revenue, sales and financial performance reviews and also perform in-depth on-site reviews focused on ongoing operating margin improvement initiatives. We interact frequently with our management companies and on-site management personnel, including conducting regular meetings with key executives of our management companies and brands. We work to maximize value of our assets through all aspects of the hotel operation and ancillary real estate opportunities.

 

    In-House Project Management Provides Better and Faster Capital Plan Execution. By maintaining a dedicated in-house capital planning and project management team, we believe we are able to develop our capital plans and execute our renovation projects at a lower cost and in a more timely manner than if we outsourced these services. In addition, our project management team has extensive experience in the ground-up development of hotel properties, providing both in-depth knowledge of building construction as well as the opportunity for us to evaluate potential development opportunities. We view this as a significant competitive strength relative to many of our peers.

 

    Rigorous Capital Allocation Strategies Enhance Portfolio Performance. As part of our ongoing asset management activities, we regularly review opportunities to reinvest in our hotels to maintain quality, increase long-term value and generate attractive returns on invested capital. We also may opportunistically dispose of hotels to take advantage of market conditions or in situations where the hotels no longer fit within our strategic objectives. We believe our breadth of experience and integrated in-house asset management and project management teams are instrumental in our ability to acquire and operate assets and to capitalize on redevelopment opportunities.

 

 

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    Leverage Existing Infrastructure for Growth. Prior to the separation of Inland American’s Suburban Select Service Portfolio, our asset management and project management employees were responsible for asset management oversight of the Prior Combined Portfolio (including our 46 hotels). We have retained all of our asset management and project management employees, who, upon completion of our separation from Inland American, will solely be focused on aggressively asset managing our hotels. We believe this will provide us with the capacity to accommodate additional growth without a corresponding increase in employees focusing on asset management and project management. Our core acquisition, asset management and project management teams have been working together for a number of years and have well-established systems and procedures.

Investment Risks

An investment in shares of our common stock involves substantial risks and uncertainties that may adversely affect our business, financial condition and results of operations. You should carefully consider the matters discussed in “Risk Factors” beginning on page 39 of this information statement before deciding to invest in shares of our common stock. Some of the risks relating to an investment in Xenia include the following:

 

    our ability to make distributions to our stockholders may be adversely affected by various operating risks common to the lodging industry, including competition, over-building and dependence on business travel and tourism;

 

    the lodging industry is highly cyclical in nature, and we cannot assure you how long the growth period of the current lodging cycle will last;

 

    the seasonality of the lodging industry is expected to cause quarterly fluctuations in our revenues;

 

    we operate in a highly competitive industry;

 

    there are inherent risks with investments in real estate, including the relative liquidity of such investments;

 

    we are dependent on the performance of the third-party hotel management companies that manage the operations of each of our hotels and could be materially and adversely affected if such third-party managers do not properly manage our hotels or otherwise act in our best interests;

 

    if we are unable to maintain good relationships with third-party hotel managers and franchisors, profitability could decrease and our growth potential may be adversely affected;

 

    costs associated with, or failure to maintain, brand operating standards may materially and adversely affect our results of operations and profitability;

 

    we may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Inland American, and we may no longer enjoy certain benefits from Inland American;

 

    volatility in the financial markets and challenging economic conditions could adversely affect our ability to secure debt financing on attractive terms and our ability to service any future indebtedness that we may incur;

 

    our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us;

 

    if we are unable to repay or refinance our existing debt, we may be unable to sustain or increase distributions to our stockholders and our share price may be adversely affected;

 

    our failure to comply with all covenants in our existing or future debt agreements could materially and adversely affect us;

 

 

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    failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders;

 

    if Inland American failed to qualify as a REIT in its 2011 through 2015 taxable years, we would be prevented from electing to qualify as a REIT and if so, would be required to pay income taxes at corporate rates plus pay penalty taxes;

 

    REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions;

 

    our agreements with Inland American in connection with the separation and distribution by Inland American involve potential conflicts of interest, and may not reflect terms that would have resulted from negotiations between unaffiliated third parties;

 

    we are dependent on Inland American to provide services to us pursuant to the Transition Services Agreement, and it may be difficult to replace the services provided under such agreement;

 

    potential indemnification obligations to Inland American pursuant to the Separation and Distribution Agreement could materially adversely affect our results of operations and financial condition;

 

    Inland American’s board of directors has reserved the right, in its sole discretion, to amend, modify or abandon the separation and distribution by Inland American and the related transactions at any time prior to the distribution date. In addition, the separation and distribution by Inland American and related transactions are subject to the satisfaction or waiver by Inland American’s board of directors in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met;

 

    in connection with our separation from Inland American, Inland American will indemnify us for certain pre-distribution liabilities and liabilities related to Inland American assets. However, there can be no assurance that these indemnities will be sufficient to protect us against the full amount of such liabilities, or that Inland American’s ability to satisfy its indemnification obligations will not be impaired in the future;

 

    there is currently no public market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely; and

 

    other factors set forth under “Risk Factors” in this information statement.

Our Structure and Reorganization Transactions

Our History

We were formed as a Delaware corporation in 2007 as a wholly-owned subsidiary of Inland American. Subsequently, we changed our name from Inland American Lodging Group, Inc. to IA Lodging Group, Inc. and converted to a Maryland corporation in 2014. On August 5, 2014, we changed our name to Xenia Hotels & Resorts, Inc.

Our operating partnership was formed as a North Carolina limited partnership in 1994. Our wholly-owned subsidiary is the sole general partner of our operating partnership, and we conduct substantially all of our business through our operating partnership. We own 100% of the OP Units in our operating partnership. On September 17, 2014, our operating partnership was converted to a Delaware limited partnership and changed its name to XHR LP.

 

 

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From our formation in 2007 until March 2014, our management team, which has continuously been dedicated to Inland American’s entire hotel portfolio, including the Xenia Portfolio and, until its sale, the Suburban Select Service Portfolio, was employed by an affiliate of The Inland Real Estate Group of Companies, Inc., Inland American’s sponsor. In connection with Inland American’s self-management in March 2014, our management team and our other employees ceased to be employed by an affiliate of Inland American’s sponsor and became our employees.

Prior to the internal reorganization transactions described below, we own all of our hotels and certain of our TRS lessees, and our remaining TRS lessees are owned by subsidiaries of Inland American other than us. Prior to the internal reorganization transactions described below and sale of the Suburban Select Service Portfolio, we also owned all of the Suburban Select Service Portfolio and subsidiaries leasing certain hotels in the Suburban Select Service Portfolio, and the remaining subsidiaries leasing the Suburban Select Service Portfolio were owned by subsidiaries of Inland American other than us.

The Suburban Select Service Portfolio was sold on November 17, 2014 to unaffiliated third party purchasers for approximately $1.1 billion, resulting in net proceeds to Inland American of approximately $480 million after prepayment of certain indebtedness and related costs. None of the proceeds from the sale of the Suburban Select Service Portfolio were retained by Xenia. Pursuant to the terms of the Separation and Distribution Agreement, we have agreed to assume the first $8 million of liabilities (including any related fees and expenses) incurred following the distribution relating to, arising out of or resulting from the ownership, operation or sale of the Suburban Select Service Portfolio and that relate to, arise out of or result from a claim or demand that is made against Xenia or Inland American by any person who is not a party or an affiliate of a party to the Separation and Distribution Agreement, other than liabilities arising from the breach or alleged breach by Inland American of certain fundamental representations made by Inland American to the third party purchasers of the Suburban Select Service Portfolio. We have also agreed to assume and indemnify Inland American for certain tax liabilities attributable to the Suburban Select Service Portfolio. As part of our working capital at the time of distribution, Inland American has agreed to leave us with cash estimated to be sufficient to satisfy such tax obligations. See “Certain Relationships and Related Transactions—Agreements with Inland American—Separation and Distribution Agreement.” The hotels included in the Suburban Select Service Portfolio were not retained by Xenia because such hotels do not generally fit within our investment criteria of investing in premium full service, lifestyle and urban upscale hotels, with a focus on the Top 25 Markets as well as key leisure destinations in the United States. In selecting the hotels to retain in the Xenia portfolio, we also took into consideration factors such as supply growth dynamics in various markets, RevPAR and risk-adjusted return potential.

 

 

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The following chart shows our structure prior to the Reorganization Transactions described below and the sale of the Suburban Select Service Portfolio.

 

LOGO

Our Corporate Reorganization

Prior to or concurrently with the completion of the separation and distribution, we have engaged or will engage in certain reorganization transactions which are designed to: consolidate the ownership of our hotels into our operating partnership; consolidate our TRS lessees into our TRS; facilitate our separation from Inland American and the distribution; and enable us to qualify as a REIT for U.S. federal income tax purposes beginning with our short taxable year that commenced on January 5, 2015.

The significant elements of our Reorganization Transactions include:

 

    The company was renamed and converted to a Maryland corporation;

 

    Our operating partnership was renamed and converted to a Delaware limited partnership;

 

    Certain of our TRS lessees have been or will be transferred from a subsidiary of Inland American into our TRS;

 

 

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    Certain subsidiaries owning our hotels have been or will be transferred to our operating partnership from other subsidiaries of ours, which subsidiaries have been or will be transferred to subsidiaries of Inland American other than us prior to the distribution;

 

    We classified and designated 125 shares of Series A Preferred Stock and issued 125 shares to 125 individual investors;

 

    We issued 113,396,997 shares of our common stock to Inland American pursuant to a stock dividend effectuated prior to the distribution; and

 

    Certain subsidiaries that previously owned or leased the Suburban Select Service Portfolio were transferred out of our operating partnership and our TRS and into subsidiaries of Inland American.

The following chart shows our structure following the Reorganization Transactions and sale of the Suburban Select Service Portfolio, but prior to the distribution.

 

LOGO

 

 

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The following chart shows our structure following the Reorganization Transactions, the sale of the Suburban Select Service Portfolio and the distribution.

 

LOGO

Our Post-Separation Relationship with Inland American

We will enter into a Separation and Distribution Agreement with Inland American. In addition, we will enter into various other agreements with Inland American to effect the separation and provide a framework for our relationship with Inland American after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and Inland American of Inland American’s assets, liabilities and obligations (including its properties, employees and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Inland American and will govern certain relationships between us and Inland American after the separation.

Except as expressly set forth in the Separation and Distribution Agreement, Xenia shall be responsible for paying all fees and expenses incurred in connection with the separation and distribution and all transactions related thereto, whether incurred prior to, on or after the distribution date, including investment banking, legal, accounting advisory work, loan restructuring, and listing-related fees. To the extent such fees were incurred prior to the distribution date and paid by Inland American, Xenia has agreed to reimburse Inland American for such fees and expenses.

We and Inland American will enter into a Transition Services Agreement prior to the distribution pursuant to which Inland American and its subsidiaries will provide, on an interim, transitional basis, certain legal,

 

 

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information technology, and financial reporting services and other assistance that is consistent with the services provided by Inland American to Xenia before the separation or that provide temporary assistance while Xenia develops its own stand-alone systems and processes and transitions historical information and processes from Inland American to Xenia. The costs of the services to be provided to us are estimated to be approximately $500,000 to $800,000 in the first twelve months following the separation.

We and Inland American will also enter into an Employee Matters Agreement in connection with the separation for the purpose of allocating between us certain assets, liabilities and responsibilities with respect to employee-related matters. The Employee Matters Agreement will govern Inland American’s and Xenia’s compensation and employee benefit obligations relating to current and former employees of each company, and generally will allocate liabilities and responsibilities relating to employee compensation and benefit plans and arrangements.

For additional information regarding the Separation and Distribution Agreement, the Transition Services Agreement and the Employee Matters Agreement, please refer to the sections entitled “Risk Factors—Risks Related to Our Relationship with Inland American and the Separation” and “Certain Relationships and Related Transactions.”

In addition, immediately after the separation, Inland American will own approximately 5% of our outstanding common stock.

Our Financing Strategy

We intend to maintain a strong, flexible and growth-oriented capital structure that will allow us to access multiple forms of capital and be strategic in determining when to access the debt or equity markets. As of September 30, 2014, we have pro forma net debt to pro forma annualized Adjusted EBITDA of 4.3x. This calculation reflects the repayment of approximately $57.7 million (after giving effect to $40.5 million of increases in aggregate principal amounts under certain existing mortgage indebtedness) of borrowings outstanding under existing mortgage indebtedness prior to or concurrently with the completion of the separation and distribution and the repayment of approximately $26.3 million of borrowings outstanding under existing mortgage indebtedness expected to be repaid on or about March 1, 2015 and assumes excess cash on hand at the Company of approximately $41.0 million at the time of separation from Inland American. Concurrent with the listing of our common stock, we expect to have an unsecured revolving credit facility pursuant to which we may borrow up to $400 million, which we believe provides us liquidity and flexibility to execute our growth strategy and manage short-term cash flow needs. We also have a well-staggered debt maturity profile. We believe our moderate leverage and strong liquidity will allow us to be proactive in pursuing our growth strategy. For more information regarding our proposed unsecured credit facility, see “Business—Our Financing Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Indebtedness.”

Distribution Policy

We anticipate making regular quarterly distributions to our stockholders. Assuming a distribution ratio of one share of Xenia common stock for every eight shares of Inland American common stock, we intend to pay a pro rata initial dividend with respect to the period beginning on the completion of the separation and distribution and ending March 31, 2015 based on a dividend of $0.23 per share for a full quarter. On an annualized basis, this would be $0.92 per share of common stock. We expect that the cash required to fund our dividends will be covered by cash generated by operations.

To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  i. 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

 

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  ii. 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  iii. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law and other factors described under “Distribution Policy.” We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained. Our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio. Distributions will be made in cash to the extent cash is available for distribution. We may not be able to generate sufficient cash flows to pay distributions to our stockholders. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any shortfall, including borrowing under our anticipated $400 million unsecured revolving credit facility, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related or debt securities or declaring taxable share dividends. In addition, our charter allows us to issue preferred stock that could have a preference over our common stock as to distributions. The terms of our Series A Preferred Stock provide that we may not pay dividends on our common stock unless full cumulative dividends for all prior dividend periods have been or contemporaneously are paid or declared on all outstanding shares of Series A Preferred Stock. We currently have no intention to issue any preferred stock other than the Series A Preferred Stock currently issued and outstanding, but if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock. In addition, our board of directors could change our distribution policy in the future. See “Risk Factors.” Distributions to our stockholders will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income or may constitute a return of capital. For a discussion of the tax treatment of distributions to holders of our common stock, please refer to “Material U.S. Federal Income Tax Consequences.”

“Dutch Auction” Tender Offer

In conjunction with the expected listing of our common stock on or about             , 2015, we expect to commence a modified “Dutch Auction” tender offer to purchase up to $125 million of our shares of common stock. If the tender offer is commenced, we expect to allow stockholders to tender all or a portion of their shares, but if the tender offer is oversubscribed, shares would be accepted on a prorated basis. We anticipate funding the tender offer and all related fees and expenses with cash from the Capital Contribution and cash on our balance sheet. If we commence the modified “Dutch Auction” tender offer, the full details will be included in an offer to purchase and related materials which will become available to all stockholders promptly following commencement of the tender offer and filed with the SEC in accordance with applicable securities laws. Until such time as we determine to commence the tender offer, there can be no assurances that we will in fact commence a modified “Dutch Auction” tender offer or any other tender offer for our shares of common stock.

Our Tax Status

We intend to elect to be taxed as a REIT for U.S. federal income tax purposes beginning with our short taxable year that commenced on January 5, 2015. We believe that we have been organized and will operate in a manner that will allow us to qualify as a REIT for U.S. federal income tax purposes commencing with such short taxable year, and we intend to continue operating in such a manner. To qualify for REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains. See “Material U.S. Federal Income Tax Consequences.”

 

 

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We will conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT, in which our hotels are indirectly owned by our operating partnership, through subsidiary limited partnerships, limited liability companies or other legal entities. We own and control 100% of the sole general partner of our operating partnership and own, directly or indirectly, 100% of the OP Units in our operating partnership. In the future, we may issue common or preferred units in our operating partnership from time to time in connection with acquisitions of hotels or for financing, compensation or other reasons.

In order for the income from our hotel operations to constitute “rents from real property” for purposes of the gross income tests required for REIT qualification, we cannot directly or indirectly operate any of our hotels. Accordingly, we lease each of our hotels, and intend to lease any hotels we acquire in the future, to our TRS lessees. As required for our qualification as a REIT, our TRS lessees have engaged third-party hotel management companies to manage our hotels on market terms. Our TRS lessees pay rent to us that we intend to treat as “rents from real property”. Our TRS, which will own our TRS lessees, is subject to U.S. federal, state and local income taxes applicable to corporations.

Restrictions on Ownership and Transfer of Our Stock

Our charter authorizes our directors to take such actions as are necessary or appropriate to enable us to qualify as a REIT. Furthermore, our charter prohibits any person from actually or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors, in its sole discretion, may exempt (prospectively or retroactively) a person from the ownership limits if certain conditions are satisfied. However, our board of directors may not grant an exemption from the ownership limits to any proposed transferee whose ownership, direct or indirect, in excess of 9.8% of the value or number of outstanding shares of any class or series of our capital stock, could jeopardize our status as a REIT. These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to continue to qualify as a REIT or that compliance with such restrictions is no longer required for us to qualify as a REIT. The ownership limits may delay or impede a transaction or a change of control that might be in your best interest. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

JOBS Act

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

An emerging growth company may also take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

 

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    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until we cease to be an emerging growth company. We will, in general, qualify as an emerging growth company until the earliest of (a) the last day of our fiscal year following the fifth anniversary of the date of our separation from Inland American; (b) the last day of our fiscal year in which we have an annual gross revenue of $1.0 billion or more; (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and (d) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities and Exchange Act of 1934 (the “Exchange Act”), which would occur at such time as we (1) have an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (2) have been required to file annual and quarterly reports under the Exchange Act for a period of at least 12 months and (3) have filed at least one annual report pursuant to the Exchange Act.

As a result of our status as an emerging growth company, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

Our Principal Office

Our principal executive offices are located at 200 S. Orange Avenue, Suite 1200, Orlando, Florida, 32801, and our telephone number is (407) 317-6950. We maintain a website at www.xeniareit.com. The information contained on our website or that can be accessed through our website neither constitutes part of this information statement nor is incorporated by reference herein.

 

 

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Questions and Answers about Us and the Separation

 

Why is the separation structured as a distribution?

Inland American believes that a distribution of our shares is an efficient way to separate our assets and that the separation will create benefits and value for us and Inland American.

 

Why am I receiving this document?

Inland American is delivering this document to you because you are a holder of common stock of Inland American. If you are a holder of Inland American common stock as of the close of business on             , 2015, you are entitled to receive one share of Xenia common stock for every eight shares of Inland American common stock that you held at the close of business on such date. The number of shares of Inland American common stock you own will not change as a result of the distribution. This document will help you understand how the separation and distribution will affect your investment in Inland American and your investment in Xenia following the separation.

 

How will the separation work?

At the time of the separation and distribution, Xenia will own, through its subsidiaries, a portfolio of hotel assets. Inland American will distribute 95% of the outstanding shares of Xenia’s common stock to Inland American’s stockholders on a pro rata basis. Following the separation, we will be an independent public company and have applied to list our shares on the NYSE.

 

When will the distribution occur?

We expect that Inland American will distribute the shares of our common stock on             , 2015 to holders of record of shares of Inland American common stock as of the close of business on             , 2015, subject to certain conditions described under “Our Separation from Inland American—Conditions to the Distribution.” No assurance can be provided as to the timing of the separation or that all conditions to the separation will be met.

 

What do stockholders of Inland American need to do to participate in the distribution?

Nothing, but we urge you to read this entire information statement carefully. Holders of shares of Inland American common stock as of the distribution record date will not be required to take any action to receive Xenia common stock on the distribution date. No stockholder approval of the distribution is required or sought. We are not asking you for a proxy, and you are requested not to send us a proxy. You will not be required to make any payment, or to surrender or exchange your shares of Inland American common stock or take any other action to receive your shares of our common stock on the distribution date. If you own shares of Inland American common stock as of the close of business on the distribution record date, Inland American, with the assistance of DST Systems, Inc., the distribution agent, will electronically issue shares of our common stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of our common stock, or your bank or brokerage firm will credit your account for the shares. Following the

 

 

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distribution, stockholders whose shares are held in book-entry form may request that their shares of Xenia common stock held in book-entry form be transferred to a brokerage or other account at any time, without charge.

 

How many shares of Xenia common stock will I receive in the distribution?

Inland American will distribute to you one share of Xenia common stock for every eight shares of Inland American common stock held by you as of the record date. An aggregate of 107,728,098 shares of Xenia common stock will be distributed to stockholders of Inland American and 5,669,899 shares of Xenia common stock will be retained by Inland American. For additional information on the distribution, please refer to “Our Separation from Inland American.”

 

Will I be taxed on the shares of Xenia common stock that I receive in the distribution?

Yes. The distribution will be in the form of a taxable special distribution to Inland American stockholders. An amount equal to the fair market value of our common stock received by you will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Inland American, with the excess treated as a nontaxable return of capital to the extent of your tax basis in shares of Inland American common stock and any remaining excess treated as capital gain. If this special distribution is distributed in the structure and timeframe currently anticipated, the special distribution is expected to satisfy a portion of Inland American’s 2015 REIT taxable income distribution requirements. Inland American or other applicable withholding agents may be required to withhold on all or a portion of the distribution payable to non-U.S. stockholders. For a more detailed discussion, see “Our Separation From Inland American —Certain Material U.S. Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences.”

 

Can Inland American decide to cancel the distribution of our common stock even if all the conditions have been met?

Yes. The distribution is subject to the satisfaction or waiver of certain conditions. See “Our Separation from Inland American— Conditions to the Distribution.” Even if all conditions to the distribution are satisfied, Inland American may terminate and abandon the distribution at any time prior to the effectiveness of the distribution in its sole discretion.

 

Does Xenia plan to pay dividends?

We anticipate making regular quarterly distributions to our stockholders. Assuming a distribution ratio of one share of Xenia common stock for every eight shares of Inland American common stock, we intend to pay a pro rata initial dividend with respect to the period beginning on the completion of the separation and distribution and ending March 31, 2015 based on a dividend of $0.23 per share for a full quarter. On an annualized basis, this would be $0.92 per share of common stock. We expect that the cash required to fund our dividends will be covered by cash generated by operations.

 

 

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To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  i. 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  ii. 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  iii. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

 

  Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including restrictions under applicable law and other factors described under “Distribution Policy.” We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained.

 

Will Xenia have a dividend reinvestment plan?

Xenia does not intend to have a dividend reinvestment plan in the foreseeable future. Any future determination to adopt a dividend reinvestment plan will be at the discretion of our board of directors and will depend on such factors as our board of directors deems relevant.

 

Will Xenia have any debt?

Yes. Following the separation, we expect to have an aggregate of $1,195.1 million of outstanding mortgage indebtedness secured by mortgages encumbering 30 hotels. Of this amount, $29.0 million is recourse to the Company. In addition, we anticipate repaying one loan secured by one hotel with outstanding principal amount of $26.3 million on or about March 1, 2015. Further, we intend to enter into a $400 million unsecured revolving credit facility in connection with the separation. We have received commitments of $400 million, subject to customary closing conditions. We do not expect to have any outstanding borrowings under our revolving credit facility upon the completion of the separation.

 

  For additional information relating to our planned financing arrangements, see “Business—Our Financing Strategy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Indebtedness.”

 

What will the separation cost?

Inland American anticipates that it will incur pre-tax separation costs of approximately $25.0 million to $29.0 million. Pursuant to the Separation and Distribution Agreement, Xenia shall be responsible for paying all costs and expenses incurred in connection with the separation and distribution and all transactions related thereto, whether

 

 

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incurred prior to or after the distribution date, including investment banking, legal, accounting advisory work, loan restructuring, and listing-related fees. To the extent such fees were incurred prior to the distribution date, Xenia has agreed to reimburse Inland American for such fees.

 

How will the separation affect my tax basis and holding period in shares of Inland American common stock?

Your tax basis in shares of Inland American held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by Inland American in the distribution exceeds Inland American’s current and accumulated earnings and profits. Your holding period for such Inland American shares will not be affected by the distribution. See “Our Separation from Inland American —Certain Material U.S. Federal Income Tax Consequences of the Separation.” You should consult your own tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non U.S. tax laws.

 

What will my tax basis and holding period be for shares of Xenia common stock that I receive in the distribution?

Your tax basis in shares of our common stock received will equal the fair market value of such shares on the distribution date. Your holding period for such shares will begin the day after the distribution date. See “Our Separation from Inland American—Certain Material U.S. Federal Income Tax Consequences of the Separation.”

 

  You should consult your tax advisor as to the particular tax consequences of the distribution to you, including the applicability of any U.S. federal, state, local and non-U.S. tax laws.

 

What will be the relationships between Inland American and Xenia following the separation?

Following the distribution, we and Inland American will be separate companies, with Inland American retaining approximately 5% of our outstanding common stock. We will enter into a Separation and Distribution Agreement to effect the separation and distribution. The Separation and Distribution Agreement and a Transition Services Agreement will provide a framework for our relationships with Inland American after the separation and distribution. The Separation and Distribution Agreement will govern the relationships between Inland American and us subsequent to the completion of the separation and provide for the allocation between Inland American and us of Inland American’s assets, liabilities and obligations (including tax-related assets and liabilities) attributable to periods prior to the separation. We cannot assure you that this agreement is on terms as favorable to us as agreements with independent third parties. See “Certain Relationships and Related Transactions.”

 

How will Inland American vote any shares of our common stock it retains?

No voting arrangements or agreements will be made between Inland American and Xenia. Inland American will vote its shares of our common stock in the manner that it believes to be in the best interest of Inland American.

 

What does Inland American intend to do with any shares of our common stock it retains?

Inland American will decide what actions to take with respect to its shares of our common stock, including whether to dispose of or continue to retain such shares, based on what it believes to be in the best interest of Inland American.

 

 

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Will I receive physical certificates representing shares of Xenia common stock following the separation?

No. Following the separation, neither Inland American nor we will be issuing physical certificates representing shares of our common stock. Instead, Inland American, with the assistance of DST Systems, Inc., the distribution agent, will electronically issue shares of our common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. The distribution agent will mail you a book-entry account statement that reflects your shares of Xenia common stock, or your bank or brokerage firm will credit your account for the shares. A benefit of issuing stock electronically in book-entry form is that there will be none of the physical handling and safekeeping responsibilities that are inherent in owning shares represented by physical share certificates.

 

Will I receive a fractional number shares of Xenia common stock?

No. A fractional number of shares of our common stock will not be issued in the separation. If you would be entitled to receive a fractional share in the separation, then you will instead receive a cash payment in lieu of the fractional share, which cash payment may be taxable to you. See “Our Separation from Inland American —General—Treatment of Fractional Shares.”

 

Will I be able to trade shares of Xenia common stock on a public market?

There is not currently a public market for our common stock. We have applied to list our common stock on the NYSE under the symbol “XHR.” We anticipate that trading in our common stock will begin on the first trading day following the distribution date. We cannot predict the trading prices for our common stock.

 

Will the number of Inland American shares I own change as a result of the distribution?

No. The number of shares of Inland American common stock you own will not change as a result of the distribution.

 

Will the separation and distribution affect the value of my Inland American shares?

Yes. As a result of the distribution, Inland American expects the value of the shares of Inland American stock immediately following the distribution to be lower than the value of such shares immediately prior to the distribution because the value of the Inland American stock will no longer reflect the value of the Xenia Portfolio.

 

Will the separation and distribution affect the dividend I receive on my Inland American shares?

Yes. If the separation and distribution are completed, Inland American will review and announce a revised dividend and distribution policy. Inland American’s distribution payments will decrease after the separation and distribution because Xenia will own all of Inland American’s current lodging portfolio and these assets produce a substantial portion of Inland American’s cash flow from operations. After giving effect to the separation and distribution, the aggregate distributions paid by Inland American and Xenia, on a combined basis, will be less than the current level of distributions paid by Inland American.

 

Are there risks to owning shares of Xenia common stock?

Yes. Our business is subject to various risks including risks relating to the separation. These risks are described in the “Risk Factors” section of this information statement beginning on page 39. We encourage you to read that section carefully.

 

 

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Where can Inland American stockholders get more information?

Before the separation, if you have any questions relating to the separation, you should contact:

Inland American Investor Services

Tel: 855-377-0510

www.inlandamerican.com

 

  After the separation, if you have any questions relating to our common stock, you should contact:

Xenia Investor Services

Tel: 844-248-2205

www.xeniareit.com

 

  After the separation, if you have any questions relating to Inland American’s common stock, you should contact:

 

 

Inland American Investor Services

 

Tel: 855-377-0510

www.inlandamerican.com

 

 

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The Separation and Distribution

 

Distributing company

Inland American Real Estate Trust, Inc.

 

Distributed company

Xenia Hotels & Resorts, Inc.

 

  We are a Maryland corporation and, prior to the separation, Inland American owned 100% of the outstanding shares of our common stock. After the separation, we will be an independent publicly traded company and intend to conduct our business as a REIT for U.S. federal income tax purposes.

 

Distribution ratio

Each holder of shares of Inland American common stock will receive one share of our common stock for every eight shares of Inland American common stock held as of the close of business on             , 2015. If you would be entitled to a fractional number of shares of our common stock, you will instead receive a cash payment in lieu of the fractional share. See “Our Separation from Inland American – General – Treatment of Fractional Shares.”

 

Distributed securities

Inland American will distribute 95% of the outstanding shares of Xenia common stock outstanding immediately before the distribution. Based on the approximately 861,824,777 shares of Inland American common stock outstanding as of December 29, 2014, assuming distribution of 95% of the outstanding shares of our common stock and applying the distribution ratio (without accounting for cash to be issued in lieu of fractional shares), we expect that approximately 107,728,098 million shares of Xenia common stock will be distributed to Inland American stockholders and approximately 5,669,899 shares of Xenia common stock will be retained by Inland American.

 

Record date

The record date is the close of business on             , 2015.

 

Distribution date

The distribution date is on or about             , 2015.

 

Distribution

On the distribution date, Inland American, with the assistance of DST Systems, Inc., the distribution agent, will electronically issue shares of our common stock to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. You will not be required to make any payment or surrender or exchange your shares of Inland American common stock or take any other action to receive your shares of our common stock on the distribution date. The distribution agent will mail you a book-entry account statement that reflects your shares of our common stock, or your bank or brokerage firm will credit your account for the shares. Following the distribution, stockholders whose shares of Inland American common stock are held in book-entry form may request that their shares of Xenia common stock be transferred to a brokerage or other account at any time, without charge. Beneficial stockholders that hold shares through brokerage firms will receive additional information from their brokerage firms shortly after the distribution date.

 

 

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Conditions to the distribution

The distribution of shares of our common stock by Inland American is subject to the satisfaction of certain conditions, including the following:

 

    the board of directors of Inland American shall have authorized the distribution, which authorization may be made or withheld in the Inland American board’s sole and absolute discretion;

 

    our registration statement on Form 10, of which this information statement is a part, shall have become effective under the Exchange Act, and no stop order relating to the registration statement shall be in effect and no proceedings for such purpose shall be pending before, or threatened by, the SEC;

 

    Xenia’s common stock will have been approved for listing on the NYSE, subject to official notice of issuance;

 

    no preliminary or permanent injunction or other order, decree, or ruling issued by a governmental authority, and no statute (as interpreted through orders or rules of any governmental authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any governmental authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the separation and distribution and other transaction contemplated thereby;

 

    the receipt of all necessary consents and approvals from lenders, lessors, managers and franchisors;

 

    any required actions and filings necessary or appropriate under federal or state securities and blue sky laws of the U.S. will have been taken;

 

    the receipt by Xenia of an opinion from Hunton & Williams LLP to the effect that, beginning with Xenia’s short taxable year that commenced on January 5, 2015, Xenia has been organized and operated in conformity with the requirements for qualification as a REIT under the Code, and its current and proposed method of operation will enable it to satisfy the requirements for qualification and taxation as a REIT;

 

    the Transition Services Agreement and the Employee Matters Agreement shall have been executed and delivered by each of the parties thereto and no party to any of such agreements shall be in material breach of any such agreement;

 

    the effectiveness of the amendment and restatement of Xenia’s charter and bylaws;

 

    the executive officers and directors of Xenia shall be as set forth in this information statement;

 

    Xenia and the applicable lenders shall have executed a definitive Credit Agreement related to the $400 million unsecured revolving credit facility;

 

 

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    Inland American shall have made the Capital Contribution and an additional capital contribution of $16.0 million;

 

    Xenia shall have a minimum cash balance of at least $50.0 million at the time of separation;

 

    the existing revolving credit facility of Inland American shall have been terminated and Inland American shall have entered into a new credit facility upon the terms and with such lenders as it shall determine in its sole discretion;

 

    no event or development shall have occurred or failed to occur that, in the judgment of the board of directors of Inland American, in its sole discretion, prevents the consummation of the separation and distribution and related transactions or any portion thereof or makes the consummation of such transactions inadvisable;

 

    any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect; and

 

    the Separation and Distribution Agreement will not have been terminated.

 

  Even if all conditions to the distribution are satisfied, Inland American may terminate and abandon the distribution at any time prior to the effectiveness of the distribution.

 

Stock exchange listing

We have applied to list our shares of common stock on the NYSE under the symbol “XHR.”

 

Distribution agent, transfer agent

DST Systems, Inc.

and registrar for Xenia Common

333 West 11th Street

Stock

Kansas City, MO 64105

(816) 435-1000

 

Tax considerations

The distribution of our common stock will not qualify for tax-deferred treatment, and an amount equal to the fair market value of the shares received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Inland American. The excess will be treated as a non-taxable return of capital to the extent of your tax basis in shares of Inland American common stock and any remaining excess will be treated as capital gain. Your tax basis in shares of Inland American held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by Inland American in the distribution exceeds Inland American’s current and accumulated earnings and profits. Your holding period for such Inland American shares will not be affected by the distribution. Your tax basis in shares of our common stock received will equal the fair market value of the shares received by you on the distribution date. Your holding period for such shares will begin the day following the distribution of our common stock. Inland

 

 

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American will not be able to advise stockholders of the amount of earnings and profits of Inland American until after the end of the 2015 calendar year. Inland American or other applicable withholding agents may be required to withhold on all or a portion of the distribution payable to non-U.S. stockholders. For a more detailed discussion, see “Our Separation From Inland American—Certain U.S. Material Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences.”

 

Relationship between Inland American and Xenia following the separation and distribution

We will enter into a Separation and Distribution Agreement to effect the separation and distribution. In addition, we will enter into various other agreements with Inland American to effect the separation and provide a framework for our relationship with Inland American after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and Inland American of Inland American’s assets, liabilities and obligations (including its properties, employees and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Inland American and will govern certain relationships between us and Inland American after the separation. See “Certain Relationships and Related Transactions.”

 

 

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Summary Historical and Pro Forma Combined Consolidated Financial and Operating Data

You should read the following summary historical and pro forma combined consolidated financial and operating data together with “Selected Historical Combined Consolidated Financial Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and the combined consolidated financial statements and related notes included elsewhere in this information statement.

The following table sets forth our summary historical and pro forma combined consolidated financial and operating data. Our summary historical combined consolidated financial data as of December 31, 2013, 2012 and 2011 and for the years then ended have been derived from our audited combined consolidated financial statements, included elsewhere in this information statement. The summary historical combined consolidated financial and operating data as of and for the nine months ended September 30, 2014 and 2013 have been derived from our unaudited condensed combined consolidated interim financial statements included elsewhere in this information statement.

Our financial statements reflect the operations of the Prior Combined Portfolio, which, among other things, classifies the Suburban Select Service Portfolio as held for sale with the related results from operations reported as discontinued operations, and include allocations of costs from certain corporate and shared functions provided to us by Inland American, as well as costs associated with participation by certain of our executives in Inland American’s benefit plans. The allocation methods for corporate and shared services costs vary by function but were generally based on historical costs of assets or headcount.

Because the historical combined consolidated financial statements represent the financial and operating data of the Prior Combined Portfolio, and the Company will own solely the Xenia Portfolio following the separation from Inland American, the historical combined consolidated financial statements included in this information statement do not reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public company during the periods presented owning solely the Xenia Portfolio. Accordingly, our historical results should not be relied upon as an indicator of future performance.

The summary pro forma combined consolidated financial and operating data is derived from our unaudited pro forma combined consolidated financial statements as of September 30, 2014 and for the nine months then ended as well as our unaudited pro forma statement of income for the year ended December 31, 2013, included elsewhere in this information statement. We derived our unaudited pro forma combined consolidated financial statements by applying pro forma adjustments to our historical combined consolidated financial statements included elsewhere in this information statement. The pro forma combined consolidated financial and operating data give effect to:

 

    the consummation of the Reorganization Transactions, after which we will own solely the Xenia Portfolio;

 

    the exclusion of the Suburban Select Service Portfolio to the extent it is reflected as held for sale on the Company’s balance sheet as of September 30, 2014;

 

    the Capital Contribution;

 

    the issuance of 125 shares of Series A Preferred Stock;

 

    the repayment of approximately $84.0 million of borrowings outstanding under existing mortgage indebtedness, funded by Inland American;

 

    reflect an additional capital contribution of $16.0 million, all of which the Company intends to use to paydown existing mortgage indebtedness in 2015;

 

 

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    a non-cash contribution of $86.8 million to settle the Company’s allocated share of Inland American’s unsecured credit facility;

 

    the entry into the Company’s new $400 million unsecured revolving credit facility;

 

    the issuance of 113,396,997 shares of our common stock to Inland American pursuant to a stock dividend prior to the distribution;

 

    the distribution of 107,728,098 shares of our common stock to holders of Inland American common stock based upon the number of Inland American shares outstanding on             , 2015 and 5,669,899 shares retained by Inland American; and

 

    certain other adjustments as described in “Unaudited Pro Forma Combined Consolidated Financial Statements.”

In addition, the unaudited pro forma combined consolidated statements of operations and other financial and operating data:

 

    reflect the consummation of the acquisition of the Aston Waikiki Beach Hotel (which the Company acquired on February 28, 2014) and the 2013 Acquisitions (as defined in footnote 2 “Acquisition and Disposition Adjustments” of the section titled “Unaudited Pro Forma Combined Consolidated Financial Statements—Notes to Pro Forma Combined Consolidated Financial Statements” below) as if such acquisitions had been completed on January 1, 2013; and

 

    exclude the operating results of two hotels, one sold on May 30, 2014 and one sold on August 28, 2014.

The pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the pro forma combined consolidated financial statements provide a detailed discussion of how such adjustments were derived and presented in the pro forma combined consolidated financial and operating data. See “Unaudited Pro Forma Combined Consolidated Financial Statements—Notes to Pro Forma Combined Consolidated Financial Statements.” The pro forma combined consolidated financial information should be read in conjunction with “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization,” “Capitalization,” “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions,” “Description of Indebtedness” and our combined consolidated financial statements and related notes thereto and the financial statements of the Aston Waikiki Beach Hotel and related notes thereto included elsewhere in this information statement.

 

 

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The pro forma combined consolidated financial and operating data has been prepared for illustrative purposes only and is not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such pro forma combined consolidated financial and operating data necessarily indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Forward-Looking Statements.”

 

    Xenia Portfolio     Prior Combined Portfolio  
    Pro Forma
Combined Consolidated
    Condensed
Combined Consolidated
    Combined Consolidated  
    For the
nine months
ended
September 30,
2014
    For the
twelve months
ended
December 31,
2013
    For the
nine months
ended
September 30,
2014
    For the
nine months
ended
September 30,
2013
    For the
year ended
December 31,
2013
    For the
year ended
December 31,
2012
    For the
year ended
December 31,
2011
 

Selected Statement of Operations Data:

             

Revenues:

             

Room revenues

  $ 476,893      $ 587,743      $ 481,001      $ 310,806      $ 443,267      $ 323,959      $ 224,561   

Food and beverage revenues

    169,588        219,045        171,379        108,692        168,368        116,260        65,002   

Other revenues

    44,630        54,287        44,375        27,316        40,236        26,661        15,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 691,111      $ 861,075      $ 696,755      $ 446,814      $ 651,871      $ 466,880      $ 305,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Room expenses

    104,899        133,671        105,777        66,250        96,444        70,165        48,218   

Food and beverage expenses

    115,536        151,591        117,250        75,008        114,011        78,080        45,421   

Other direct expenses

    24,848        31,626        24,843        16,742        24,542        17,401        9,138   

Other indirect expenses

    159,383        203,135        162,698        108,553        157,385        117,355        75,545   

Management fees

    39,276        43,694        39,788        26,275        37,683        26,827        18,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel operating expenses

    443,942        563,717        450,356        292,828        430,065        309,828        196,985   

Depreciation and amortization

    106,875        139,747        106,231        71,696        104,229        89,629        68,600   

Real estate taxes, personal property taxes and insurance

    30,098        35,496        30,595        19,100        27,548        22,382        14,403   

General and administrative expenses

    26,743        17,060        24,268        9,059        14,151        9,008        6,997   

Business management fees

    1,474        12,743        1,474        9,334        12,743        10,812        9,996   

Acquisition transaction costs

    —          —          1,148        1,116        2,275        751        649   

Provision for asset impairments

    —          21,041        4,665        26,175        49,145        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  $ 609,132      $ 789,804      $ 618,737      $ 429,308      $ 640,156      $ 442,410      $ 297,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 81,979      $ 71,271      $ 78,018      $ 17,506      $ 11,715      $ 24,470      $ 7,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

             

Gain (loss) on sale of investment properties

    —          —          865        —          —          (589     —     

Other income (loss)

    71        (2,140     (999     335        (1,113     798        988   

Interest expense

    (38,762     (51,899     (43,534     (39,005     (52,792     (45,061     (28,885

Equity in earnings (loss) and gain (loss) and (impairment) of investment in unconsolidated entities, net

    —          —          4,216        (184     (33     (3,719     60   

Income tax (expense) benefit

    (5,786     (3,043     (5,786     (6,139     (3,043     (5,718     3,207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 37,502      $ 14,189      $ 32,780      $ (27,487   $ (45,266   $ (29,819   $ (17,012
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from discontinued operations

    —          —          1,812        (1,746     (6,202     (10,638     (97,293

Less: Net income attributable to noncontrolling interests

    —          —          —          —          —          (5,689     (288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Company

  $ 37,502      $ 14,189      $ 34,592      $ (29,233   $ (51,468   $ (46,146   $ (114,593
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Pro forma basic earnings per share

  $ 0.33      $ 0.12        N/A        N/A        N/A        N/A        N/A   

Pro forma diluted earnings per share

    0.33        0.12        N/A        N/A        N/A        N/A        N/A   

Pro forma weighted average shares outstanding – basic

    113,529,973        113,397,997        N/A        N/A        N/A        N/A        N/A   

Pro forma weighted average shares outstanding – diluted

    114,043,050        113,793,924        N/A        N/A        N/A        N/A        N/A   

Other Financial Data:

             

Adjusted EBITDA(1)

  $ 195,280      $ 233,855      $ 252,190      $ 177,856      $ 243,757      $ 201,589      $ 169,350   

Funds from operations(2)

  $ 144,377      $ 174,977      $ 176,776      $ 106,444      $ 152,311      $ 114,957      $ 102,724   

Adjusted FFO(2)

  $ 150,625      $ 182,305      $ 182,525      $ 111,028      $ 159,062      $ 116,171      $ 105,036   

Operating Data(3):

             

Number of Hotels(4)

    46        46        47        40        46        32        25   

Number of Rooms(4)

    12,636        12,636        12,797        11,037        12,152        8,849        6,225   

Occupancy

    78.1     75.7     78.1     74.2     73.6     71.5     71.7

ADR

  $ 176.91      $ 168.25      $ 176.20      $ 159.97      $ 161.69      $ 150.59      $ 146.74   

RevPAR

  $ 138.24      $ 127.29      $ 137.70      $ 118.67      $ 119.05      $ 107.68      $ 105.27   

 

 

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    Xenia Portfolio     Prior Combined Portfolio  
    Pro
Forma Combined
Consolidated
    Condensed
Combined

Consolidated
    Combined Consolidated  
    As of
September 30, 2014
    As of
September 30, 2014
    As of
December 31, 2013
    As of
December 31, 2012
    As of
December 31, 2011
 

Selected Balance Sheet Data:

         

Cash and cash equivalents

  $ 266,977 (5)    $ 126,525      $ 89,169      $ 65,004      $ 44,014   

Restricted cash

    104,996        105,296        87,804        65,847        52,777   

Total assets

    3,074,896        3,878,351        3,756,658        2,878,708        2,552,560   

Total debt

    1,166,780        1,337,590        1,280,220        1,011,421        1,242,017   

Total equity

    1,804,352        1,883,627        1,818,255        1,217,977        1,247,674   

 

(1) EBITDA is a commonly used measure of performance in many industries and is defined as net income or loss (calculated in accordance with GAAP) excluding interest expense, provision for income taxes (including income taxes applicable to sale of assets) and depreciation and amortization. We consider EBITDA useful to an investor regarding our results of operations, in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results, even though EBITDA does not represent an amount that accrues directly to common stockholders. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions and along with FFO and Adjusted FFO, it is used by management in the annual budget process for compensation programs.

 

     We further adjust EBITDA for certain additional items such as hotel property acquisitions and pursuit costs, amortization of share-based compensation, equity investment adjustments, the cumulative effect of changes in accounting principles, impairment of real estate assets, and other costs we believe do not represent recurring operations and are not indicative of the performance of our underlying hotel property entities. We believe Adjusted EBITDA provides investors with another financial measure in evaluating and facilitating comparison of operating performance between periods and between REITs that report similar measures.

 

 

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     The following is reconciliation of net income (loss) to EBITDA and Adjusted EBITDA the nine months ended September 30, 2014 and 2013 and the years ended December 31, 2013, 2012 and 2011 (in thousands):

 

    Pro Forma     Condensed Combined
Consolidated
    Combined Consolidated  
    Nine months
ended
September 30,
2014
    Twelve
months
ended
December 31,
2013
    Nine months
ended
September 30,
2014
    Nine months
ended
September 30,
2013
    For the
year ended
December 31,
2013
    For the
year ended
December 31,
2012
    For the
year ended
December 31,
2011
 

Net income (loss) from continuing operations

    $37,502      $ 14,189      $ 32,780      $ (27,487   $ (45,266   $ (29,819   $ (17,012

Net income (loss) from discontinued operations

    —          —          1,812        (1,746     (6,202     (10,638     (97,293

Net loss attributable to noncontrolling interests

    —          —          —          —          —          (5,689     (288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Company

    $37,502      $ 14,189      $ 34,592      $ (29,233   $ (51,468   $ (46,146   $ (114,593

Interest expense

    38,762        51,899        67,253        63,868        85,701        82,986        71,093   

Equity in interest expense of joint venture

    —          —          31        289        311        990        750   

Income tax expense (benefit)

    5,786        3,043        5,786        6,139        3,043        5,718        (3,207

Depreciation and amortization related to investment properties

    106,875        139,747        142,793        109,871        154,861        155,777        146,019   

Depreciation and amortization related to investment in unconsolidated entities

    —          —          100        695        821        1,602        1,612   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    $188,925      $ 208,878      $ 250,555      $ 151,629      $ 193,269      $ 200,927      $ 101,674   

Reconciliation to Adjusted EBITDA

             

Impairment of investment properties

    $       —        $ 21,041      $ 4,665      $ 26,175      $ `49,145      $ —        $ —     

Impairment of investment properties reflected in discontinued operations

    —          —          —          —          —          6,224        69,793   

Impairment of investment in unconsolidated entities

    —          —          —          1,003        1,003        2,465        (53

(Gain) loss on sale of property

    —          —          (865     (1,575     (1,564     (6,367     (54

(Gain) loss on extinguishment of debt

    —          1,027        1,196        —          20        (4,178     (2,660

(Gain) loss from sale of investment in unconsolidated entities

    —          —          (4,509     (492     (487     1,402        —     

Acquisition and pursuit costs

    —          —          1,148        1,116        2,371        1,116        650   

Amortization of share-based compensation expense

    3,496        2,909        —          —          —          —          —     

Other expenses(a)

    2,859        —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    $195,280      $ 233,855      $ 252,190      $ 177,856      $ 243,757      $ 201,589      $ 169,350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) For the nine months ended September 30, 2014, other adjustments include costs related to preparation of the listing of our common stock on the NYSE, such as legal, audit fees and other professional fees.

 

(2) We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairment, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, adjustments for unconsolidated partnerships and joint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales of real estate, impairments of real estate assets, extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

 

 

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We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO such as hotel property acquisition and pursuit costs, amortization of share-based compensation, and other expenses we believe do not represent recurring operations. We believe that Adjusted FFO provides investors with useful supplemental information that may facilitate comparisons of ongoing operating performance between periods and between REITs that make similar adjustments to FFO and is beneficial to an investor’s complete understanding of our operating performance.

The following is a reconciliation of our GAAP net income (loss) to FFO and Adjusted FFO for the nine months ended September 30, 2014 and 2013 and years ended December 31, 2013, 2012 and 2011 (in thousands):

 

    Xenia Portfolio     Prior Combined Portfolio  
    Pro Forma     Condensed
Combined Consolidated
    Combined Consolidated  
    Nine
months ended
September 30,
2014
    Twelve
months ended
December 31,
2013
    Nine
months ended
September 30,
2014
    Nine
months ended
September 30,
2013
    For the
year ended
December 31,
2013
    For the
year ended
December 31,
2012
    For the
year ended
December 31,
2011
 

Net income (loss) from continuing operations

    $37,502      $ 14,189      $ 32,780      $ (27,487   $ (45,266   $ (29,819   $ (17,012

Net income (loss) from discontinued operations

    —          —          1,812        (1,746     (6,202     (10,638     (97,293

Net loss attributable to noncontrolling interests

    —          —          —          —          —          (5,689     (288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Company

  $ 37,502      $ 14,189      $ 34,592      $ (29,233   $ (51,468   $ (46,146   $ (114,593

Depreciation and amortization related to investment properties

    106,875        139,747        142,793        109,871        154,861        155,777        146,019   

Depreciation and amortization related to investment in unconsolidated entities

    —          —          100        695        821        1,602        1,612   

Impairment of investment properties

    —          21,041        4,665        26,175        49,145        —          —     

Impairment of investment properties reflected in discontinued operations

    —          —          —          —          —          6,224        69,793   

Impairment of investment in unconsolidated entities

    —          —          —          1,003        1,003        2,465        (53

(Gain) loss on sale of property

    —          —          (865     (1,575     (1,564     (6,367     (54

(Gain) loss from sale of investment in unconsolidated entities

    —          —          (4,509     (492     (487     1,402        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

  $ 144,377      $ 174,977      $ 176,776      $ 106,444      $ 152,311      $ 114,957      $ 102,724   

Reconciliation to Adjusted FFO

             

(Gain) loss on extinguishment of debt

  $ —        $ 1,027      $ 1,196      $ —        $ 20      $ (4,178   $ (2,660

Acquisition and pursuit costs

    —          —          1,148        1,116        2,371        1,116        650   

Amortization of mark to market debt discounts or premium, net

    2,752        3,392        3,405        3,468        4,360        4,276        4,322   

Amortization of share-based compensation

    3,496        2,909        —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted FFO

  $ 150,625      $ 182,305      $ 182,525      $ 111,028      $ 159,062      $ 116,171      $ 105,036   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FFO, Adjusted FFO, EBITDA and Adjusted EBITDA do not represent cash generated from operating activities under GAAP and should not be considered as alternatives to net income or loss, operating profit, cash flows from operations or any other operating performance measure prescribed by GAAP. Although we present and use FFO, Adjusted FFO, EBITDA and Adjusted EBITDA because we believe they are useful to investors in evaluating and facilitating comparisons of our operating performance between periods and between REITs that report similar measures, the use of these non-GAAP measures has certain limitations as analytical tools. These non-GAAP financial measures are not measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to fund capital expenditures, contractual commitments, working capital, service debt or make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that we have incurred and will incur. These non-GAAP financial measures may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments and uncertainties. These non-GAAP financial measures as presented may not be comparable to non-GAAP financial measures as calculated by other real estate companies.

We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

 

(3) For only those hotels operated by Marriott, our historical annual operating results represented here from 2011 to 2013 include a 52-53 week fiscal calendar used by Marriott at that time.

 

(4) Number of Hotels and Number of Rooms as of period end.

 

 

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(5) Upon our separation from Inland American, in addition to the Capital Contribution and the additional capital contribution of $16.0 million, we expect to have a minimum of approximately $50 million of cash on hand, before the payment of fees and expenses related to the separation and certain other costs as described in “Certain Relationships and Related Transactions—Agreements with Inland American—Separation and Distribution Agreement.” Cash in excess of this amount may be distributed to Inland American in Inland American’s sole discretion, pursuant to the Separation and Distribution Agreement.

 

 

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RISK FACTORS

Owning our common stock involves a high degree of risk. You should consider carefully the following risk factors and all other information contained in this information statement If any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, occur, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the market price of our common stock could decline significantly, and you could lose all or a part of the value of your ownership in our common stock. Some statements in this information statement, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section in this information statement entitled “Forward-Looking Statements.”

Risks Related to Our Business and Industry

Our ability to make distributions to our stockholders may be adversely affected by various operating risks common to the lodging industry, including competition, over-building and dependence on business travel and tourism.

We own hotels which have different economic characteristics than many other real estate assets. A typical office property, for example, has long-term leases with third-party tenants, which provides a relatively stable long-term stream of revenue. Hotels, on the other hand, generate revenue from guests that typically stay at the hotel for only a few nights, which causes the room rate and occupancy levels at each of our hotels to change every day, and results in earnings that can be highly volatile.

In addition, our hotels will be subject to various operating risks common to the lodging industry, many of which are beyond our control, including, among others, the following:

 

    changes in general economic conditions, including the severity and duration of any downturn in the U.S. or global economy and financial markets;

 

    war, political conditions or civil unrest, terrorist activities or threats and heightened travel security measures instituted in response to these events;

 

    outbreaks of pandemic or contagious diseases, such as norovirus, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine flu) and Ebola;

 

    natural or man-made disasters, such as earthquakes, like the one in Napa, California that impacted two of our lodging properties on August 24, 2014, tsunamis, tornados, hurricanes, typhoons, floods, oil spills and nuclear incidents;

 

    delayed delivery or any material reduction or prolonged interruption of public utilities and services, including water and electric power;

 

    decreased corporate or government travel-related budgets and spending and cancellations, deferrals or renegotiations of group business;

 

    decreased need for business-related travel due to innovations in business-related technology;

 

    low consumer confidence, high levels of unemployment or depressed real estate prices;

 

    competition from other hotels in the markets in which we operate;

 

    over-building of hotels in the markets in which we operate, which results in increased supply and will adversely affect occupancy and revenues at our hotels;

 

    requirements for periodic capital reinvestment to repair and upgrade hotels;

 

    increases in operating costs due to inflation and other factors that may not be offset by increased room rates;

 

    change in interest rates and the availability, cost and terms of financing;

 

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    the financial condition and general business condition of the airline, automotive and other transportation-related industries and its impact on travel;

 

    decreased airline capacities and routes;

 

    oil prices and travel costs;

 

    statements, actions or interventions by governmental officials related to travel and corporate travel-related activities and the resulting negative public perception of such travel and activities; and

 

    risks generally associated with the ownership of hotels and real estate, as we discuss in detail below.

These factors, and the reputational repercussions of these factors, can adversely affect, and from time to time have adversely affected, individual hotels, particular regions and our business, financial condition, results of operations and our ability to make distributions to our stockholders.

The lodging industry is highly cyclical in nature, and we cannot assure you how long the growth period of the current lodging cycle will last.

Due to its close link with the performance of the general economy, and, specifically, growth in U.S. GDP, the lodging industry is highly cyclical in nature. Demand for products and services provided by the lodging industry generally trails improvement in economic conditions, but since 2010 the lodging industry has recovered faster and stronger than the U.S. economy generally. There can be no assurance of either any further increase in demand for hotel rooms from current levels or of the timing or extent of any such demand growth. If demand weakens, our operating results and profitability could be adversely affected. Though we have seen sustained improvement in economic and industry fundamentals, we cannot assure you that these conditions will continue to improve or that the recovery will remain sustainable. Worsening of the U.S. economy, if experienced, would likely have an adverse impact on the occupancy, ADR and RevPAR of our hotels, and would therefore adversely impact our results of operations and financial condition. In addition, in an economic downturn, luxury, upper upscale and upscale hotels may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates.

In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging industry’s performance and overbuilding has the potential to further exacerbate the negative impact of an economic downturn. Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. Although we believe that lodging demand growth will exceed lodging supply growth in 2015 and for the next several years, no assurances can be made that this will be achieved. A reduction or slowdown in growth of lodging demand or increased growth in lodging supply could result in returns that are substantially below expectations or result in losses, which could materially and adversely affect our revenues and profitability as well as limit or slow our future growth.

The seasonality of the lodging industry is expected to cause quarterly fluctuations in our revenues.

The lodging industry is seasonal in nature, which can be expected to cause quarterly fluctuations in our hotel room revenues, occupancy levels, room rates, operating expenses and cash flows. Our quarterly earnings may be adversely affected by factors outside our control, including timing of holidays, weather conditions and poor economic factors in certain markets in which we operate. The periods during which our hotels experience higher or lower levels of demand vary from property to property and depend upon location, type of property and competitive mix within the specific location. Based on historical results, we generally expect our revenue to be lower in the first quarter. This seasonality can be expected to cause periodic fluctuations in a hotel’s room revenues, occupancy levels, room rates and operating expenses. We can provide no assurances that our cash flows will be sufficient to offset any shortfalls that occur as a result of these fluctuations. As a result, we may have to enter into short-term borrowings in certain quarters in order to make distributions to our stockholders, and we can provide no assurances that such borrowings will be available on favorable terms, if at all. Consequently, volatility in our financial performance resulting from the seasonality of the lodging industry could adversely affect our financial condition and results of operations.

 

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We operate in a highly competitive industry.

The lodging industry is highly competitive. Our hotels compete with other hotels based on a number of factors, including room rates, quality of accommodations, service levels and amenities, location, brand affiliation, reputation and reservation systems. New hotels may be constructed and these additions to supply create new competitors, in some cases without corresponding increases in demand for hotel rooms. Some of our competitors also have greater financial and marketing resources than we do, which could allow them to reduce their rates, offer greater convenience, services or amenities, build new hotels in direct competition with our existing hotels, improve their properties, expand and improve their marketing efforts, all of which could adversely affect the ability of our hotels to attract prospective guests and materially and adversely affect our revenues and profitability as well as limit or slow our future growth.

We also compete for hotel acquisitions with entities that have similar investment objectives as we do. This competition could limit the number of suitable investment opportunities offered to us. It may also increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire new properties on attractive terms or on the terms contemplated in our business plan.

There are inherent risks with investments in real estate, including the relative liquidity of such investments.

Investments in real estate are subject to varying degrees of risk. For example, an investment in real estate cannot generally be quickly sold, and we cannot predict whether we will be able to sell any hotel we desire to for the price or on the terms set by us or acceptable to us, or the length of time needed to find a willing purchaser and to close the sale of the hotel. Moreover, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other types of real estate companies. In particular, the tax laws applicable to REITs require that we hold our hotels for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of hotels that otherwise would be in our best interests. Therefore, we may not be able to vary our portfolio promptly in response to changing economic, financial and investment conditions and dispose of assets at opportune times or on favorable terms, which may adversely affect our cash flows and our ability to make distributions to stockholders.

In addition, our ability to dispose of some of our hotels could be constrained by their tax attributes. Hotels that we own for a significant period of time or that we acquire through tax-deferred contribution transactions in exchange for OP Units in our operating partnership may have low tax bases. If we dispose of these hotels outright in taxable transactions, we may be required to distribute the taxable gain to our stockholders under the requirements of the Code applicable to REITs or to pay tax on that gain, either of which, in turn, would impact our cash flow and increase our leverage. In some cases, we may be restricted from disposing of properties contributed to us in the future in exchange for our OP Units under tax protection agreements with contributors unless we incur additional costs related to indemnifying those contributors. To dispose of low basis or tax-protected hotels efficiently, we may from time to time use like-kind exchanges, which qualify for non-recognition of taxable gain, but can be difficult to consummate and result in the hotel for which the disposed assets are exchanged inheriting their low tax bases and other tax attributes.

Investments in real estate also are subject to adverse changes in general economic conditions. Among the factors that could impact our hotels and the value of an investment in us are:

 

    risks associated with the possibility that cost increases will outpace revenue increases and that in the event of an economic slowdown, the high proportion of fixed costs will make it difficult to reduce costs to the extent required to offset declining revenues;

 

    changes in tax laws and property taxes, or an increase in the assessed valuation of a property for real estate tax purposes;

 

    adverse changes in the federal, state or local laws and regulations applicable to us, including those affecting zoning, fuel and energy consumption, water and environmental restrictions, and the related costs of compliance;

 

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    changing market demographics;

 

    an inability to acquire and finance real estate assets on favorable terms, if at all;

 

    the ongoing need for owner funded capital improvements and expenditures to maintain or upgrade hotels;

 

    fluctuations in real estate values or potential impairments in the value of our assets;

 

    acts of God, such as earthquakes, floods or other uninsured losses; and

 

    changes in interest rates and availability, cost and terms of financing.

We are dependent on the performance of the third-party hotel management companies that manage the operations of each of our hotels and could be materially and adversely affected if such third-party managers do not properly manage our hotels or otherwise act in our best interests.

In order for us to qualify as a REIT, third parties must operate our hotels. We lease each of our hotels to our TRS lessees. Our TRS lessees, in turn, have entered into management agreements with third party management companies to operate our hotels. We could be materially and adversely affected if any of our third-party managers fail to provide quality services and amenities, fail to maintain a quality brand name or otherwise fail to manage our hotels in our best interest, and can be financially responsible for the actions and inactions of our third-party managers pursuant to our management agreements. In addition, our hotel managers or their affiliates may manage, and in some cases may own, may have invested in or may have provided credit support or operating guarantees to hotels that compete with our hotels, any of which could result in conflicts of interest. As a result, our hotel managers may make decisions regarding competing lodging facilities that are not in our best interests. From time to time, disputes may arise between us and our third-party managers regarding their performance or compliance with the terms of the hotel management agreements, which in turn could adversely affect our results of operations. If we are unable to reach satisfactory results through discussions and negotiations, we may choose to terminate our management agreement, litigate the dispute or submit the matter to third-party dispute resolution, the outcome of which may be unfavorable to us.

Under the terms of the hotel management agreements, our ability to participate in operating decisions regarding our hotels is limited to certain matters, including approval of the annual operating budget, and we do not have the authority to require any hotel to be operated in a particular manner. While our TRS lessees closely monitor the performance of our third-party managers, our general recourse under most of the hotel management agreements is limited to termination if our third-party managers are not performing adequately. For example, in many of our hotel management agreements, we have a right to terminate a management agreement if the third-party manager fails to achieve certain hotel performance criteria measured over any two consecutive fiscal years, as outlined in the applicable management agreement. However, even if a third-party manager fails to perform under the terms of its respective management agreement, it generally has the option to avoid a performance termination by paying a performance deficit fee as specified in the applicable management agreement.

In the event that we terminate any of our management agreements, we can provide no assurances that we could find a replacement manager or that any replacement manager will be successful in operating our hotels. In addition, many of our existing franchise agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. If any of the foregoing were to occur, it could materially and adversely affect us.

Restrictive covenants in certain of our hotel management and franchise agreements contain provisions limiting or restricting the sale of our hotels, which could materially and adversely affect our profitability.

Hotel management and franchise agreements typically contain restrictive covenants that limit or restrict our ability to sell a hotel without the consent of the hotel management company or franchisor. Many of our franchise

 

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agreements provide the franchisor with a right of first offer in the event of certain sales or transfers of a hotel and provide that the franchisor has the right to approve any change in the hotel management company engaged to manage the hotel. Generally, we may not agree to sell, lease or otherwise transfer particular hotels unless the transferee executes a new agreement or assumes the related hotel management and franchise agreements. If the hotel management company or franchisor does not consent to the sale of our hotels, we may be prohibited from taking actions that would otherwise be in our and our stockholders’ best interests.

Contractual and other disagreements with or involving third-party hotel management companies and franchisors could make us liable to them or result in litigation costs or other expenses.

Our management and franchise agreements require us and third-party hotel managers and franchisors to comply with operational and performance conditions that are subject to interpretation and could result in disagreements. At any given time, we may be in disputes with one or more hotel management company or franchisor. Any such dispute could be very expensive for us, even if the outcome is ultimately in our favor. We cannot predict the outcome of any arbitration or litigation, the effect of any negative judgment against us or the amount of any settlement that we may enter into with any third-party. In the event we terminate a management or franchise agreement early and the manager or franchisor considers such termination to have been wrongful, they may seek damages. Additionally, we may be required to indemnify our third-party hotel managers and franchisors against disputes with third parties, pursuant to our management and franchise agreements. An adverse result in any of these proceedings could materially and adversely affect our revenues and profitability.

If we are unable to maintain good relationships with third-party hotel managers and franchisors, profitability could decrease and our growth potential may be adversely affected.

The success of our respective hotel investments and the value of our franchised properties largely depend on our ability to establish and maintain good relationships with the third-party hotel managers and franchisors of our respective hotel management and franchise agreements. If we are unable to maintain good relationships with third-party hotel managers and franchisors, we may be unable to renew existing management or franchise agreements or expand relationships with them. Additionally, opportunities for developing new relationships with additional third-party managers or franchisors may be adversely affected. This, in turn, could have an adverse effect on our results of operations and our ability to execute our growth strategy.

Costs associated with, or failure to maintain, brand operating standards may materially and adversely affect our results of operations and profitability.

Under the terms of our franchise agreements and certain of our management agreements, we are required to meet specified operating standards and other terms and conditions and compliance with such standards may be costly. We expect that our franchisors will periodically inspect our hotels to ensure that we and the hotel management companies follow brand standards. Failure by us, or any hotel management company that we engage, to maintain these standards or other terms and conditions could result in a franchise license being canceled or the franchisor requiring us to undertake a costly property improvement program. If a franchise license is terminated due to our failure to make required improvements or to otherwise comply with its terms, we also may be liable to the franchisor for a termination payment, which will vary by franchisor and by hotel. If the funds required to maintain brand operating standards are significant, or if a franchise license is terminated, it could materially and adversely affect our results of operations and profitability.

If we were to lose a brand license at one or more of our hotels, the value of the affected hotels could decline significantly and we could incur significant costs to obtain new franchise licenses, which could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

If we were to lose a brand license, the underlying value of a particular hotel could decline significantly from the loss of associated name recognition, marketing support, participation in guest loyalty programs and the centralized reservation system provided by the franchisor or brand manager, which could require us to recognize

 

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an impairment on the hotel. Furthermore, the loss of a franchise license at a particular hotel could harm our relationship with the franchisor or brand manager, which could impede our ability to operate other hotels under the same brand, limit our ability to obtain new franchise licenses or brand management agreements from the franchisor or brand in the future on favorable terms, or at all, and cause us to incur significant costs to obtain a new franchise license or brand management agreement for the particular hotel. Accordingly, if we lose one or more franchise licenses or brand management agreement, it could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

A substantial number of our hotels operate under the Marriott, Hilton or Hyatt brand families; therefore, we are subject to risks associated with concentrating our portfolio in three brand families.

In our portfolio, 37 of the 46 hotels that we own as of the date of this information statement utilize brands owned by Marriott, Hilton or Hyatt. As a result, our success is dependent in part on the continued success of Marriott, Hilton and Hyatt and their respective brands. We believe that building brand value is critical to increase demand and build customer loyalty. Consequently, if market recognition or the positive perception of Marriott, Hilton and/or Hyatt is reduced or compromised, the goodwill associated with the Marriott-, Hilton- and Hyatt-branded hotels in our portfolio may be adversely affected. Furthermore, if our relationship with Marriott, Hilton and/or Hyatt were to deteriorate or terminate as a result of disputes regarding the management of our hotels or for other reasons, Marriott, Hilton and/or Hyatt could, under certain circumstances, terminate our current franchise licenses with them or decline to provide franchise licenses for hotels that we may acquire in the future. If any of the foregoing were to occur, it could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth and impair our ability to compete effectively.

We have a concentration of hotels in Texas and California, which exposes our business to the effects of regional events and occurrences.

We have a concentration of hotels in Texas and California. Specifically, as of September 30, 2014, approximately 43% of rooms in our system were located in Texas and California. The concentration of hotels in a region may expose us to risks of adverse economic developments that are greater than if our portfolio were more geographically diverse. These economic developments include regional economic downturns, significant increases in the number of our competitors’ hotels in these markets and potentially higher local property, sales and income taxes in the geographic markets in which we are concentrated. In addition, our hotels are subject to the effects of adverse acts of nature, such as winter storms, hail storms, strong winds, earthquakes and tornados, which have in the past caused damage such as flooding and other damage to our hotels in specific geographic locations, including in the Texas and California markets. Depending on the severity of these acts of nature, the damage to our hotels could require closure of all or substantially all of our hotels in one or more markets for a period of time while the necessary repairs and renovations, as applicable, are undertaken. Additionally, we cannot assure you that the amount of hurricane, windstorm, earthquake, flood or other casualty insurance maintained for these hotels from time to time would entirely cover damages caused by any such event.

As a result of this geographic concentration of hotels, we will face a greater risk of a negative impact on our revenues in the event these areas are more severely impacted by adverse economic and competitive conditions and extreme weather than other areas in the United States.

The departure of any of our key personnel who have significant experience and relationships in the lodging industry could materially and adversely impede or impair our ability to compete effectively and limit future growth prospects.

We depend on the experience and relationships of our senior management team to manage our day-to-day operations and strategic business direction. Our senior management team has an extensive network of lodging industry contacts and relationships, including relationships with global and national hotel brands, hotel owners, financiers, operators, commercial real estate brokers, developers and management companies. We can provide no

 

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assurances that any of our key personnel will continue their employment with us. The loss of services of our senior management team, or any difficulty attracting and retaining other talented and experienced personnel, could adversely affect our ability to source potential investment opportunities, our relationship with global and national hotel brands and other industry participants and the execution of our business strategy. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our common stock.

Our long-term growth depends in part on successfully identifying and consummating acquisitions of additional hotels and the failure to make such acquisitions could materially impede our growth.

A key element of our business strategy is to invest in premium full service, lifestyle and urban upscale hotels, with a focus on the Top 25 Markets and key leisure destinations in the U.S. We can provide no assurances that we will be successful in identifying attractive hotels or that, once identified, we will be successful in consummating an acquisition. We face significant competition for attractive investment opportunities from other well-capitalized investors, some of which have greater financial resources and a greater access to debt and equity capital to acquire hotels than we do. This competition increases as investments in real estate become increasingly attractive relative to other forms of investment. As a result of such competition, we may be unable to acquire certain hotels that we deem attractive or the purchase price may be significantly elevated or other terms may be substantially more onerous. In addition, we expect to finance future acquisitions through a combination of borrowings under a revolving credit facility that we anticipate will be in place concurrently with the completion of the separation, the use of retained cash flows, and offerings of equity and debt securities, which may not be available on advantageous terms, or at all. Any delay or failure on our part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede our growth.

Our acquisition, redevelopment, repositioning, renovation and re-branding activities are subject to various risks, any of which could, among other things, result in disruptions to our hotel operations, strain management resources and materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

We intend to acquire, redevelop, reposition, renovate and re-brand hotels, subject to the availability of attractive hotels or projects and our ability to undertake such activities on satisfactory terms. In deciding whether to undertake such activities, we will make certain assumptions regarding the expected future performance of the hotel or project. However, newly acquired, redeveloped, renovated, repositioned or re-branded hotels may fail to perform as expected and the costs necessary to bring such hotels up to brand standards may exceed our expectations, which may result in the hotels’ failure to achieve projected returns.

In particular, to the extent that we engage in the activities described above, they could pose the following risks to our ongoing operations:

 

    we may abandon such activities and may be unable to recover expenses already incurred in connection with exploring such opportunities;

 

    acquired, redeveloped, renovated or re-branded hotels may not initially be accretive to our results, and we and the hotel management companies may not successfully manage newly acquired, renovated, redeveloped, repositioned or re-branded hotels to meet our expectations;

 

    we may be unable to quickly, effectively and efficiently integrate new acquisitions, particularly acquisitions of portfolios of hotels, into our existing operations;

 

    our redevelopment, repositioning, renovation or re-branding activities may not be completed on schedule, which could result in increased debt service and other costs and lower revenues; and

 

    management attention may be diverted by our acquisition, redevelopment, repositioning or re-branding activities, which in some cases may turn out to be less compatible with our growth strategy than originally anticipated.

 

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The occurrence of any of the foregoing events, among others, could materially and adversely affect our results of operations and profitability as well as limit or slow our future growth.

Any difficulties in obtaining capital necessary to make required periodic capital expenditures and renovation of our hotels could materially and adversely affect our financial condition and results of operations.

Ownership of hotels is a capital intensive business that requires significant capital expenditures to operate, maintain and renovate properties. Access to the capital that we need to maintain and renovate existing properties and to acquire new properties is critical to the continued growth of our business and revenues and to remain competitive. We may not be able to fund capital improvements for our existing hotels or acquisitions of new hotels solely from cash provided from our operating activities because we must distribute annually at least 90% of our REIT taxable income to qualify as a REIT and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or hotel redevelopment through retained earnings may be restricted. Consequently, we may have to draw down on our revolving credit facility or rely upon the availability of debt or equity capital to fund capital improvements and acquisitions. Our ability to access additional capital could also be limited by the terms of our unsecured revolving credit facility, which restricts our ability to incur debt under certain circumstances.

If we are forced to spend larger amounts of cash from operating activities than anticipated to operate, maintain or renovate existing properties, then our ability to use cash for other purposes, including acquisitions of new properties, could be limited and our profits could be reduced. Similarly, if we cannot access the capital we need to fund our operations or implement our growth strategy, we may need to postpone or cancel planned renovations or acquisitions, which could impair our ability to compete effectively and harm our business.

Many real estate costs and certain hotel operating costs are fixed, even if revenue from our hotels decreases.

Many costs, such as real estate taxes, insurance premiums, maintenance costs and certain hotel operating costs generally are more fixed than variable and as a result, are not reduced even when a hotel is not fully occupied, room rates decrease or other circumstances cause a reduction in revenues. Thus, our profits are generally more significantly affected by economic downturns and declines in revenues. If we are unable to offset these costs with sufficient revenues across our portfolio, it could materially and adversely affect our results of operations and profitability.

Operating expenses may increase in the future, which may cause our cash flow and our operating results to decrease.

Operating expenses, such as expenses for fuel, utilities, labor, employee benefits, building materials and insurance are not fixed and may increase in the future. Any increases would cause our cash flow and our operating results to decrease. If we are unable to offset these decreases with sufficient revenues across our portfolio, our ability to pay distributions could be materially and adversely affected.

The land underlying six of our hotels and meeting facilities is subject to a ground lease; if we are found to be in breach of a ground lease or are unable to renew a ground lease, we could be materially and adversely affected.

We lease the land underlying six of our hotels and meeting facilities from third parties. Five of these hotels are subject to ground leases that cover all of the land underlying the respective hotel, and the sixth is subject to a ground lease that covers a portion of the land. Accordingly, we only own a long-term leasehold or similar interest in all or a portion of these six hotels. If we are found to be in breach of a ground lease, we could lose the right to use the hotel. In addition, unless we can purchase a fee interest in the underlying land and improvements or extend the terms of these leases before their expiration, as to which no assurance can be given, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. Our ability to

 

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exercise any extension options relating to our ground leases is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options, and we can provide no assurances that we will be able to exercise any available options at such time. Furthermore, we can provide no assurances that we will be able to renew any ground lease upon its expiration. If we were to lose the right to use a hotel due to a breach or non-renewal of the ground lease, we would be unable to derive income from such hotel, which could adversely affect us.

We will not recognize any increase in the value of the land or improvements subject to our ground leases and may only receive a portion of compensation paid in any eminent domain proceeding with respect to the hotel.

Unless we purchase a fee interest in the land and improvements subject to our ground leases, we will not have any economic interest in the land or improvements at the expiration of our ground leases and therefore we will not share in any increase in value of the land or improvements beyond the term of a ground lease, notwithstanding our capital outlay to purchase our interest in the hotel or fund improvements thereon, and will lose our right to use the hotel. Furthermore, if the state or federal government seizes a hotel subject to a ground lease under its eminent domain power, we may only be entitled to a portion of any compensation awarded for the seizure.

We are subject to risks associated with the employment of hotel personnel, particularly with hotels that employ unionized labor, which could increase our operating costs, reduce the flexibility of our hotel managers to adjust the size of the workforce at our hotels and could materially and adversely affect our revenues and profitability.

We have entered into management agreements with third-party hotel managers to operate our hotels. Our hotel managers are responsible for hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our hotels, we are subject to many of the costs and risks generally associated with the hotel labor force. Increased labor costs due to factors like additional taxes or requirements to incur additional employee benefits costs, including the requirements of the Affordable Care Act, may adversely impact our operating costs. Labor costs can be particularly challenging at those of our hotels with unionized labor, and additional hotels may be subject to new collective bargaining agreements in the future.

From time to time, strikes, lockouts, public demonstrations or other negative actions and publicity may disrupt hotel operations at any of our hotels, negatively impact our reputation or the reputation of our brands, or harm relationships with the labor forces at our hotels. We also may incur increased legal costs and indirect labor costs as a result of contract disputes or other events. Additionally, hotels where our managers have collective bargaining agreements with employees are more highly affected by labor force activities than others. The resolution of labor disputes or new or re-negotiated labor contracts could lead to increased labor costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. Furthermore, labor agreements may limit the ability of our hotel managers to reduce the size of hotel workforces during an economic downturn because collective bargaining agreements are negotiated between the hotel managers and labor unions. We do not have the ability to control the outcome of these negotiations.

Uninsured and underinsured losses at our hotels could materially and adversely affect our revenues and profitability.

We intend to maintain comprehensive insurance on each of our current hotels and any hotels that we acquire, including liability, fire and extended coverage, of the type and amount we believe are customarily obtained for or by hotel owners. There are no assurances that coverage will be available at reasonable rates. Various types of catastrophic losses, like windstorms, earthquakes and floods, losses from foreign terrorist activities may not be insurable or may not be economically insurable. Even when insurable, these policies may have high deductibles and/or high premiums. Lenders may require such insurance. Our failure to obtain such insurance could constitute a default under loan agreements, and/or our lenders may force us to obtain such insurance at unfavorable rates, which could materially and adversely affect our profitability and revenues.

 

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In the event of a substantial loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotel, which could materially and adversely affect our profitability.

In addition, insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. With the enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2007, United States insurers cannot exclude conventional, chemical, biological, nuclear and radiation terrorism losses. These insurers must make terrorism insurance available under their property and casualty insurance policies; however, this legislation does not regulate the pricing of such insurance. In many cases, mortgage lenders have begun to insist that commercial property owners purchase coverage against terrorism as a condition of providing mortgage loans. Such insurance policies may not be available at a reasonable cost, which could inhibit our ability to finance or refinance our hotels. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses, which could materially and adversely affect our revenues and profitability as well as limit or slow our future growth.

We could incur significant, material costs related to government regulation and litigation with respect to environmental matters, which could materially and adversely affect our revenues and profitability as well as limit or slow our future growth.

Our hotels are subject to various U.S. federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require us, as the current owner of a hotel, to perform or pay for the clean-up of contamination (including hazardous substances, asbestos and asbestos-containing materials, waste or petroleum products) at, on, under or emanating from the hotel and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned a property at the time it became contaminated, it is possible we could incur cleanup costs or other environmental liabilities even after we sell hotels. Contamination at, on, under or emanating from our hotels also may expose us to liability to private parties for costs of remediation and/or personal injury or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on our properties, environmental laws also may impose restrictions on the manner in which the properties may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.

In addition, our hotels are subject to various federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew, and waste management. Some of our hotels routinely handle and use hazardous or regulated substances and wastes as part of their operations, which substances and wastes are subject to regulation (e.g., swimming pool chemicals). Our hotels incur costs to comply with these environmental, health and safety laws and regulations and could be subject to fines and penalties for non-compliance with applicable requirements.

 

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Certain of our hotels contain, and those that we acquire in the future may contain, or may have contained, asbestos-containing material, or ACM. Federal, state and local environmental, health and safety laws require that ACM be properly managed and maintained, and include requirements to undertake special precautions, such as removal or abatement, if ACM would be disturbed during maintenance, renovation or demolition of a building. Such laws regarding ACM may impose fines and penalties on building owners, employers and operators for failure to comply with these requirements. In addition, third parties may seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our hotels could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability to third parties if property damage or personal injury occurs.

Liabilities and costs associated with environmental contamination at, on, under or emanating from our properties, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws could be material and could materially and adversely affect us. We can make no assurances that changes in current laws or regulations or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of our hotels will not be affected by our operations, the condition of the properties in the vicinity of our hotels, or by third parties unrelated to us. The discovery of material environmental liabilities at our properties could subject us to unanticipated significant costs, which could significantly reduce or eliminate our profitability and the cash available for distribution to our stockholders.

Compliance or failure to comply with the Americans with Disabilities Act and other safety regulations and requirements could result in substantial costs.

Under the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder, which we refer to collectively as the ADA, all public accommodations must meet various federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers, and non-compliance could result in the U.S. government imposing fines or in private litigants winning damages.

Our hotels also are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements would require significant unanticipated expenditures that would affect our cash flow and results of operations. If we incur substantial costs to comply with the ADA or other safety regulations and requirements, it could materially and adversely affect our revenues and profitability.

We may be subject to unknown or contingent liabilities related to recently acquired hotels and the hotels that we may acquire in the future, which could materially and adversely affect our revenues and profitability growth.

Our recently acquired hotels, and the hotels that we may acquire in the future, may be subject to unknown or contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the representations and warranties provided under the transaction agreements related to the purchase of the hotels

 

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we acquire may not survive the completion of the transactions. Furthermore, indemnification under such agreements may be limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses. As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with these hotels may exceed our expectations, and we may experience other unanticipated adverse effects, all of which could materially and adversely affect our revenues and profitability.

Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our business could reduce our profits or limit our ability to operate our business.

In the normal course of our business, we are involved in various legal proceedings. Our third-party managers, whom we indemnify for legal costs resulting from management of our hotels, may also be involved in various legal proceedings relating to the management of our hotels. The outcome of these proceedings cannot be predicted. If any of these proceedings were to be determined adversely to us or our third-party managers or a settlement involving a payment of a material sum of money were to occur, it could materially and adversely affect our profits or ability to operate our business. Additionally, we could become the subject of future claims by third parties, including current or former third-party property owners, guests who use our properties, our employees, our investors or regulators. Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our business. Further, we may incur costs related to claims for which we have appropriate third party indemnity, but such third parties fail to fulfill their contractual obligations.

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to accurately report our financial results.

In connection with operating as a public company, we will be required to provide reliable financial statements and reports to our stockholders. To monitor the accuracy and reliability of our financial reporting, we will establish an internal audit function that will oversee our internal controls. We can provide no assurances that our initial accounting policy framework and accounting procedures manual will be adequate to provide reasonable assurance to our stockholders regarding the reliability of our financial reporting and the preparation of our financial statements. In addition, we are developing and documenting current policies and procedures with respect to company-wide business processes and cycles in order to implement effective internal control over financial reporting. We will establish, or cause our third-party hotel management companies to establish, controls and procedures designed to ensure that hotel revenues and expenses are properly recorded at our hotels. While we intend to undertake substantial work to comply with Section 404 of the Sarbanes-Oxley Act, we cannot be certain that we will be successful in implementing or maintaining effective internal control over our financial reporting and may determine in the future that our existing internal controls need improvement. If we fail to implement and comply with proper overall controls, we could be materially harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our reporting obligations, result in increased costs to remediate any deficiencies, attract regulatory scrutiny or lawsuits and cause investors to lose confidence in our reported financial information, which could lead to a substantial decline in the market price of our common stock.

As an “emerging growth company,” we are permitted to rely on exemptions from certain reporting and disclosure requirements, which may make our future public filings different than that of other public companies.

We are an “emerging growth company” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting and disclosure requirements that are applicable to public companies that are not emerging growth companies. We will remain an emerging growth company for up to five years, or until the earliest of: (1) the last date of the fiscal year during which we had total annual gross revenues of

 

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$1 billion or more; (2) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (3) the date on which we are deemed to be a “large accelerated filer” as defined under Rule 12b-2 under the Exchange Act. For so long as we remain an emerging growth company, we will not be required to:

 

    have an auditor attestation report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;

 

    submit certain executive compensation matters to stockholder advisory votes pursuant to the “say on frequency” and “say on pay” provisions (requiring a non-binding stockholder vote to approve compensation of certain executive officers) and the “say on golden parachute” provisions (requiring a non-binding stockholder vote to approve golden parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; or

 

    disclose certain executive compensation related items.

If we choose to take advantage of any or all of these exemptions, the information that we provide you in our future public filings may be different than that of other public companies. The exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We continue to evaluate and monitor developments with respect to these new rules and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act.

In addition, the JOBS Act provides that an emerging growth company may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means that an emerging growth company can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. We elected to opt out of this transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of these standards is required for non-emerging growth companies. This election is irrevocable.

Market disruptions may adversely impact many aspects of our operating results and operating condition.

During the global economic downturn that began in 2008, the domestic financial markets experienced unusual volatility, uncertainty and a tightening of liquidity in both the investment grade debt and equity capital markets. Credit spreads for major sources of capital widened significantly during the U.S. credit crisis as investors demanded a higher risk premium. If there is volatility and weakness in the capital and credit markets, the availability of debt financing secured by commercial real estate could decline. Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our hotels are located, including the dislocations in the credit markets and general global economic recession. Specifically, these conditions may have the following consequences:

 

    credit spreads for major sources of capital may widen if stockholders demand higher risk premiums or interest rates could increase, due to inflationary expectations, resulting in an increased cost for debt financing;

 

    our ability to borrow on terms and conditions that we find acceptable may be limited, which could result in our hotels generating lower overall economic returns and a reduced level of cash flow from what was anticipated at the time we acquired the asset, which could potentially impact our ability to make distributions to our stockholders, or pursue acquisition opportunities, among other things;

 

    the amount of capital that is available to finance hotels could diminish, which, in turn, could lead to a decline in hotel values generally, slow hotel transaction activity, and reduce the loan to value ratio upon which lenders are willing to lend;

 

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    the value of certain of our hotels may decrease below the amounts we paid for them, which would limit our ability to dispose of hotels at attractive prices or to obtain debt financing secured by these hotels and could reduce our ability to finance our business;

 

    the value and liquidity of short-term investments, if any, could be reduced as a result of the dislocation of the markets for our short-term investments and increased volatility in market rates for these investments or other factors; and

 

    one or more counterparties to derivative financial instruments that we may enter into could default on their obligations to us, or could fail, increasing the risk that we may not realize the benefits of these instruments.

For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our investments.

We are increasingly dependent on information technology, and potential cyber-attacks, security problems, or other disruption present risks.

The third-party hotel management companies that operate our hotels rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. They may purchase some of their information technology from vendors, on whom our systems will depend, and the third-party hotel managers will rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information. We will depend upon the secure transmission of this information over public networks. Our third-party hotel management companies’ networks and storage applications will be subject to unauthorized access by hackers or others through cyber-attacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means, or may be breached due to operator error, malfeasance or other system disruptions. In some cases, it will be difficult to anticipate or immediately detect such incidents and the damage caused thereby. Any significant breakdown, invasion, destruction, interruption or leakage of our third-party hotel managers’ systems could harm us, and we may be financially responsible for certain damages arising out of the harm such events cause to third parties pursuant to our management agreements.

Changes in distribution channels, including the increasing use of intermediaries by consumers and companies may adversely affect our profitability.

Our rooms are booked through a variety of distribution channels, including hotel websites, travel agents, internet travel intermediaries and meeting procurement firms. If bookings shift to higher cost distribution channels, including internet travel intermediaries and meeting procurement firms, it could materially impact our profits. Additionally, as intermediary bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our brands and management companies. Many of these internet travel intermediaries are viewed as offering hotel rooms in a commodity-like manner, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. It is possible that consumers and companies will develop brand loyalties to their reservations systems and multi-brand representation rather than to the brands under which our properties are operated. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through the intermediaries increases significantly, room revenues may be lower than expected, and our profit may be adversely affected.

 

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Risks Related to Our Relationship with Inland American and the Separation

Our historical financial results as a subsidiary of Inland American may not be representative of our results as a separate, stand-alone company.

The historical financial information we have included in this information statement has been derived from Inland American’s consolidated financial statements and does not necessarily reflect what our financial position, results of operations or cash flows would have been had we been a separate, stand-alone company during the periods presented. Although Inland American did account for our company as a subsidiary, Inland American did not account for us, and we were not operated, as a separate, stand-alone company for the historical periods presented. The historical costs and expenses reflected in our combined financial statements include an allocation for certain corporate functions historically provided by Inland American, including general corporate expenses, employee benefits and incentives, and interest expense. These allocations were based on what we and Inland American considered to be reasonable reflections of the historical utilization levels of these services required in support of our business. The historical information does not necessarily indicate what our results of operations, financial position, cash flows or costs and expenses will be in the future. Our pro forma adjustments reflect changes that may occur in our funding and operations as a result of the separation. However, there can be no assurances that these adjustments will reflect our costs as a publicly-traded, stand-alone company. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Combined Consolidated Financial Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements” and the notes to those statements included elsewhere in this information statement.

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Inland American, and we may no longer enjoy certain benefits from Inland American.

By separating from Inland American, there is a risk that Xenia may be more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of Inland American. As part of Inland American we were able to enjoy certain benefits from Inland American’s purchasing power and borrowing leverage, and also had access to Inland American’s balance sheet and capital. Following our separation from Inland American, we will be a smaller and less diversified company than Inland American, and we will not have access to financial and other resources comparable to those of Inland American prior to the separation. As a separate, stand-alone company, we may be unable to obtain debt or goods, technology and services at prices and on terms as favorable as those available to us prior to the separation, which could materially and adversely affect us. Additionally, we may not be able to achieve the full strategic and financial benefits that we expect will result from our separation from Inland American or such benefits may be delayed or may not occur at all.

Our ability to operate our business effectively may suffer if we do not, quickly and cost-effectively, establish our own financial, administrative and other support functions in order to operate as a stand-alone company or our own internal controls and procedures, and we cannot assure you that the transition services Inland American has agreed to provide us will be sufficient for our needs.

Historically, we have relied on financial, administrative and other resources of Inland American to operate our business. In conjunction with our separation from Inland American, we will need to create our own financial, administrative and other support systems or contract with third parties to replace Inland American’s systems. In connection with our separation from Inland American, we will enter into an agreement with Inland American under which Inland American will provide certain transition services to us, including services related to information technology systems, financial reporting and accounting and legal services. The expiration date will vary by service provided and the agreement will terminate on the earlier of March 31, 2016 and the termination of the last service provided under it. See “Certain Relationships and Related Transactions—Agreements with Inland American—Transition Services Agreement” for a description of these services. These services may not be sufficient to meet our needs, and, after our agreement with Inland American expires, we may not be able to replace these services at all or obtain these services at prices and on terms as favorable as we currently have. Additionally, if Inland American does not effectively perform the services that are called for under the Transition Services Agreement, and the other agreements, we may not be able to operate our business effectively and our results of operations could be harmed.

 

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Moreover, Inland American’s indemnification obligations to us in the event of a breach by Inland American of its obligations under the Transition Services Agreement is capped at the amounts it receives for providing the services under the agreement. Any failure or significant downtime in our own financial or administrative systems or in Inland American’s financial or administrative systems during the transitional period could impact our results and/or prevent us from paying our employees, complying with financial and SEC reporting requirements or performing other administrative services on a timely basis and could materially and adversely affect us.

Additionally, upon completion of the separation, we will be required to develop and implement our own control systems and procedures to assist us in qualifying and maintaining our qualification as a public REIT, satisfying our periodic and current reporting requirements under applicable SEC regulations and complying with NYSE listing standards. As a result, substantial work on our part will be required to implement and execute appropriate reporting and compliance processes and assess their design, remediate any deficiencies identified and test the operation of such processes.

We may have potential business conflicts of interest with Inland American with respect to our past and ongoing relationships.

Conflicts of interest may arise between Inland American and us in a number of areas relating to our past and ongoing relationships, including:

 

    labor, tax, employee benefit, indemnification and other matters arising from our separation from Inland American;

 

    intellectual property matters;

 

    employee recruiting and retention;

 

    sales or distributions by Inland American of all or any portion of its ownership interest in us, which could be to one of our competitors;

 

    business combinations involving our company; and

 

    business opportunities that may be attractive to both Inland American and us.

We may not be able to resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

Potential indemnification liabilities to Inland American pursuant to the Separation and Distribution Agreement could materially adversely affect our operations.

The Separation and Distribution Agreement with Inland American provides for, among other things, the principal corporate transactions required to effect the separation and distribution, certain conditions to the separation and distribution, the allocation between us and Inland American of Inland American’s assets, liabilities and obligations attributable to periods prior to, at and after the separation, and provisions governing our relationships with Inland American following the separation and distribution. Among other things, the Separation and Distribution Agreement provides indemnification obligations designed to make us financially responsible for all liabilities that may exist relating to the “Xenia Business”, which consists of the business, operations and activities relating primarily to the Xenia Portfolio and any other hotels previously owned by Xenia or Inland American prior to the separation, other than the Suburban Select Service Portfolio, whether incurred prior to, at or after the separation and distribution. With respect to the Suburban Select Service Portfolio, notwithstanding the foregoing, we have agreed to assume the first $8 million of liabilities (including any related fees and expenses) incurred following the distribution relating to, arising out of or resulting from the ownership, operation or sale of the Suburban Select Service Portfolio and that relate to, arise out of or result from a claim or demand that is made against Xenia or Inland American by any person who is not a party or an affiliate of a party to the Separation and Distribution Agreement, other than liabilities arising from the breach or alleged breach by Inland American of

 

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certain fundamental representations made by Inland American to the third party purchasers of the Suburban Select Service Portfolio. We have also agreed to assume and indemnify Inland American for certain tax liabilities attributable to the Suburban Select Service Portfolio. As part of our working capital at the time of distribution, Inland American has agreed to leave us with cash estimated to be sufficient to satisfy such tax obligations. As a result, we may be responsible for substantial liabilities under the Separation and Distribution Agreement. For a description of the Separation and Distribution Agreement, please see “Certain Relationships and Related Transactions—Agreements with Inland American—Separation and Distribution Agreement.”

In connection with our separation from Inland American, Inland American will indemnify us for certain pre-distribution liabilities and liabilities related to Inland American assets. However, there can be no assurance that these indemnities will be sufficient to insure us against the full amount of such liabilities, or that Inland American’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement, Inland American will agree to indemnify us for certain liabilities related to Inland American assets. However, third parties could seek to hold us responsible for any of the liabilities that Inland American agrees to retain, and there can be no assurance that Inland American will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Inland American any amounts for which we are held liable, such indemnification may be insufficient to fully offset the financial impact of such liabilities and/or we may be temporarily required to bear these losses while seeking recovery from Inland American.

Our agreements with Inland American may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.

The agreements related to our separation from Inland American, including the Separation and Distribution Agreement, Transition Services Agreement and Employee Matters Agreement, were negotiated in the context of our separation from Inland American while we were still part of and a wholly-owned subsidiary of Inland American and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the context of our separation related to, among other things, allocations of assets, liabilities, rights, indemnifications and other obligations among Inland American and us. For example, when the terms of these agreements were negotiated, we did not have a board of directors that was independent from Inland American. See “Certain Relationships and Related Transactions.”

The distribution of shares of our common stock will not qualify for tax-deferred treatment and may be taxable to you as a dividend.

The distribution of shares of our common stock will not qualify for tax-deferred treatment, and an amount equal to the fair market value of the shares received by you on the distribution date will be treated as a taxable dividend to the extent of your ratable share of any current or accumulated earnings and profits of Inland American. As only a limited and insubstantial amount of cash will be paid in connection with the distribution, you will need to have alternative sources from which to pay your resulting U.S. federal income tax liability. The amount in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in shares of Inland American common stock and any remaining excess will be treated as capital gain. Your tax basis in shares of Inland American common stock held at the time of the distribution will be reduced (but not below zero) to the extent the fair market value of our shares distributed by Inland American in the distribution exceeds Inland American’s current and accumulated earnings and profits. Your holding period for such Inland American shares will not be affected by the distribution. Your holding period for your shares of our common stock will begin the day following the distribution of our common stock, and your basis in our common stock will equal the fair market value of the shares received by you on the distribution date. Inland American will not be able to advise stockholders of the amount of earnings and profits of Inland American until after the end of the 2015 calendar year. Inland American or other applicable withholding agents may be required or permitted to withhold at the

 

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applicable rate on all or a portion of the distribution payable to non-U.S. stockholders, and any such withholding would be satisfied by Inland American or such agent by withholding and selling a portion of our shares otherwise distributable to non-U.S. stockholders. For a more detailed discussion, see “Our Separation from Inland American—Certain Material U.S. Federal Income Tax Consequences of the Separation” and “Material U.S. Federal Income Tax Consequences.”

Although Inland American will be ascribing a value to our shares in the distribution for tax purposes, and will report that value to stockholders and the Internal Revenue Service, or the IRS, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to our shares, particularly if our shares trade at prices significantly above the value ascribed to our shares by Inland American in the period following the distribution. Such a higher valuation may cause a larger reduction in the tax basis of your Inland American shares or may cause you to recognize additional dividend or capital gain income. You should consult your own tax advisor as to the particular tax consequences of the distribution to you.

Inland American’s board of directors has reserved the right, in its sole discretion, to amend, modify or abandon the separation and distribution and the related transactions at any time prior to the distribution date. In addition, the separation and distribution and related transactions are subject to the satisfaction or waiver by Inland American’s board of directors in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met.

The Inland American board of directors has reserved the right, in its sole discretion, to amend, modify or abandon the separation and distribution and the related transactions at any time prior to the distribution date. This means that Inland American may cancel or delay the planned separation and distribution if at any time the board of directors of Inland American determines that it is not in the best interests of Inland American and its stockholders. If Inland American’s board of directors makes a decision to cancel the separation and distribution, stockholders of Inland American will not receive any distribution of our common stock and Inland American will be under no obligation whatsoever to its stockholders to distribute such common shares. In addition, the separation and distribution and related transactions are subject to the satisfaction or waiver by Inland American’s board of directors in its sole discretion of a number of conditions. We cannot assure you that any or all of these conditions will be met.

Risks Related to Debt Financing

Volatility in the financial markets and challenging economic conditions could adversely affect our ability to secure debt financing on attractive terms and our ability to service any future indebtedness that we may incur.

The domestic and international commercial real estate debt markets could become very volatile as a result of, among other things, the tightening of underwriting standards by lenders and credit rating agencies. This could result in less availability of credit and increasing costs for what is available. If the overall cost of borrowing increases, either by increases in the index rates or by increases in lender spreads, the increased costs may result in existing or future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution. If these disruptions in the debt markets were to persist, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets could be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase, and the return on the properties we do purchase may be lower. In addition, we may find it difficult, costly or impossible to refinance indebtedness which is maturing.

Further, economic conditions could negatively impact commercial real estate fundamentals and result in declining values in our real estate portfolio and in the collateral securing any loan investments we may make, which could have various negative impacts. Specifically, the value of collateral securing any loan investment we may make could decrease below the outstanding principal amounts of such loans, requiring us to pledge more collateral.

 

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Our organizational documents have no limitation on the amount of indebtedness we may incur. As a result, we may become highly leveraged in the future, which could materially and adversely affect us.

Our business strategy contemplates the use of both non-recourse secured and unsecured debt to finance long-term growth. In addition, our organizational documents contain no limitations on the amount of debt that we may incur, and our board of directors may change our financing policy at any time without stockholder notice or approval. As a result, we may be able to incur substantial additional debt, including secured debt, in the future. Incurring debt could subject us to many risks, including the risks that:

 

    our cash flows from operations may be insufficient to make required payments of principal and interest;

 

    our debt and resulting maturities may increase our vulnerability to adverse economic and industry conditions;

 

    we may be required to dedicate a substantial portion of our cash flows from operations to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;

 

    the terms of any refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced;

 

    Xenia may be obligated to repay the debt pursuant to guarantee obligations; and

 

    the use of leverage could adversely affect our ability to raise capital from other sources or to make distributions to our stockholders and could adversely affect the market price of our common stock.

If we violate covenants in future agreements relating to indebtedness that we may incur, we could be required to repay all or a portion of our indebtedness before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all. In addition, indebtedness agreements may require that we meet certain covenant tests in order to make distributions to our stockholders.

If we are unable to repay or refinance our existing debt, we may be unable to sustain or increase distributions to our stockholders and our share price may be adversely affected.

Our existing and future debt subject us to many risks, including the risks that:

 

    our cash flow from operations will be insufficient to make required payments of principal and interest;

 

    our debt may increase our vulnerability to adverse economic and industry conditions;

 

    we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing cash available for distribution to our stockholders, funds available for operations and capital expenditures, future business opportunities or other purposes;

 

    the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and

 

    the terms of our debt may limit our ability to make distributions to our stockholders and therefore adversely affect the market price of our shares.

If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance this debt through additional debt financing, or private or public offerings of debt or equity securities. Alternatively, we may need to sell the underlying hotel or, in certain instances, the lender may foreclose. Adverse economic conditions could cause the terms on which we borrow or refinance to be unfavorable. If we are unable to refinance our debt on acceptable terms, we may be forced to dispose of hotels on disadvantageous terms or at times which may not permit us to receive an attractive return on our investments, potentially resulting in losses adversely affecting cash flow from operating activities.

 

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Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans.

We acquired properties by borrowing monies in an amount equal to the fair market value of the acquired properties and we may, in some instances, acquire properties by assuming existing financing. We typically borrow money to finance a portion of the purchase price of assets we acquire. We may also borrow money for other purposes to, among other things, satisfy the requirement that we distribute at least 90% of our “REIT annual taxable income,” subject to certain adjustments, or as is otherwise necessary or advisable to assure that we continue to qualify as a REIT for U.S. federal income tax purposes. Over the long term, however, payments required on any amounts we borrow reduce the funds available for, among other things, acquisitions, capital expenditures for existing properties or distributions to our stockholders because cash otherwise available for these purposes is used to pay principal and interest on this debt.

If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount of cash flow from operations available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In such a case, we could lose the property securing the loan that is in default, thus reducing the value of your investment. For tax purposes, a foreclosure is treated as a sale of the property or properties for a purchase price equal to the outstanding balance of the debt secured by the property or properties. If the outstanding balance of the debt exceeds our tax basis in the property or properties, we would recognize taxable gain on the foreclosure action and we would not receive any cash proceeds. We also may fully or partially guarantee any monies that subsidiaries borrow to purchase or operate properties. In these cases, we will likely be responsible to the lender for repaying the loans if the subsidiary is unable to do so. If any mortgage contains cross-collateralization or cross-default provisions, more than one property may be affected by a default.

If we are unable to borrow at favorable rates, we may not be able to acquire new properties.

If we are unable to borrow money at favorable rates, we may be unable to acquire additional real estate assets or refinance existing loans at maturity. Further, we may enter into loan agreements or other credit arrangements that require us to pay interest on amounts we borrow at variable or “adjustable” rates. Increases in interest rates will increase our interest costs. If interest rates are higher when we refinance our loans, our expenses will increase, thereby reducing our cash flow and the amount available for distribution to you. Further, during periods of rising interest rates, we may be forced to sell one or more of our properties in order to repay existing loans, which may not permit us to maximize the return on the particular properties being sold.

Interest-only indebtedness may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.

We have obtained, and may continue to enter into mortgage indebtedness that does not require us to pay principal for all or a portion of the life of the debt instrument. During the period when no principal payments are required, the amount of each scheduled payment is less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan is not reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal required during this period. After the interest-only period, we may be required either to make scheduled payments of principal and interest or to make a lump-sum or “balloon” payment at or prior to maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan if we do not have funds available or are unable to refinance the obligation.

Existing and future debt agreements may contain, and the credit agreement governing our unsecured revolving credit facility will contain, restrictions that may limit our flexibility in operating our business.

The mortgages on our existing hotels, and hotels that we may acquire in the future likely will, contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the

 

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applicable hotel or to discontinue insurance coverage. In addition, such loans contain negative covenants that, among other things, preclude certain changes of control, inhibit our ability to incur additional indebtedness or, under certain circumstances, restrict cash flow necessary to make distributions to our stockholders.

The credit agreement governing our unsecured revolving credit facility will contain customary covenants with which we must comply, which limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, our ability to incur additional indebtedness, incur liens on assets, enter into new types of businesses, engage in mergers, liquidations or consolidations, sell assets, make restricted payments (including the payment of dividends and other distributions) after the occurrence and during the continuance of a default or event of default, enter into negative pledges or limitations on the ability of subsidiaries to make certain distributions or to guarantee the indebtedness under the credit agreement, engage in certain transactions with affiliates, enter into sale and leaseback transactions, enter into speculative hedging transactions, change our fiscal year and make certain payments and prepayments with respect to subordinated debt. The credit agreement will also contain financial covenants relating to our maximum total leverage ratio, maximum secured leverage ratio, maximum secured recourse leverage ratio, minimum fixed charge coverage ratio, minimum consolidated tangible net worth, minimum unsecured interest coverage ratio and setting a minimum number of unencumbered properties we must own and a minimum value for such unencumbered properties. Any other credit facility or secured loans that we enter into may place additional restrictions on us and may require us to meet certain financial ratios and tests. Our continued ability to borrow under the revolving credit facility and any other credit facility that we may obtain will be subject to compliance with these covenants and our ability to meet these covenants will be adversely affected if U.S. lodging fundamentals do not continue to improve when and to the extent that we expect. In addition, our failure to comply with these covenants, as well as our inability to make required payments under the credit agreement or any future debt agreement, could cause an event of default under the credit agreement, which, if not waived, could result in the termination of the financing commitments under the credit agreement and the acceleration of the maturity of the outstanding indebtedness thereunder, or could cause an event of default under such future debt agreement, which could result in the acceleration of the debt and require us to repay such debt with capital obtained from other sources, which may not be available to us or may be available only on unattractive terms. Furthermore, if we default on secured debt, lenders can take possession of the hotel or hotels securing such debt. In addition, the credit agreement will contain, and any future debt agreements may contain, cross-default provisions with respect to certain other recourse and non-recourse indebtedness and contain certain other events of default which would similarly, in each case, give the lenders under the credit agreement the right to terminate such financing commitments and accelerate the maturity of such indebtedness under the credit agreement or give the lenders under such other agreement the right to declare a default on its debt and to enforce remedies, including acceleration of the maturity of such debt upon the occurrence of a default under such other indebtedness. If we default on our credit agreement or any other debt agreements, it could materially and adversely affect us.

In addition, in connection with our debt agreements we may enter into lockbox and cash management agreements pursuant to which substantially all of the income generated by our hotel properties will be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of our lenders and from which cash will be distributed to us only after funding of certain items, which may include payment of principal and interest on our debt, insurance and tax reserves or escrows and other expenses. As a result, we may be forced to borrow additional funds in order to make distributions to our stockholders (including, potentially, to make distributions necessary to allow us to qualify as a REIT).

We may be unable to satisfy our debt obligations upon a change of control.

Under the documents that govern our indebtedness, if we experience a change of control, we could be required to incur certain penalties, fees and other expenses, which may include repayment of the entire principal balance of some of our outstanding indebtedness plus additional fees and interest. We might not have sufficient funds to repay such amounts. Any of these events could have a material adverse impact on our liquidity, business, results of operations and financial condition. The Restructuring Transactions and separation from Inland American will each constitute a change of control or otherwise require lender consent pursuant to the documents that govern our

 

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indebtedness, for which we will incur certain fees and other expenses. We do not expect that the total amount of such fees and other expenses will be material.

Covenants applicable to current or future debt could restrict our ability to make distributions to our stockholders and, as a result, we may be unable to make distributions necessary to qualify as a REIT, which could materially and adversely affect us and the market price of our common stock.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under the Code. If, as a result of covenants applicable to our current or future debt, we are restricted from making distributions to our stockholders, we may be unable to make distributions necessary for us to avoid U.S. federal corporate income and excise taxes and maintain our qualification as a REIT, which could materially and adversely affect us.

Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.

We have borrowed money, which bears interest at variable rates, and therefore are exposed to increases in costs in a rising interest rate environment. Increases in interest rates would increase our interest expense on any variable rate debt, as well as any debt that must be refinanced at higher interest rates at the time of maturity. Our future earnings and cash flows could be adversely affected due to the increased requirement to service our debt and could reduce the amount we are able to distribute to our stockholders. As of September 30, 2014 approximately $581.8 million, or 46.4% of the total debt relating to the Xenia Portfolio bore interest at variable rates.

We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition.

We may finance all or a portion of the purchase price for properties that we acquire. However, to ensure that our offers are as competitive as possible, we do not expect to enter into contracts to purchase property that include financing contingencies. Thus, we may be contractually obligated to purchase a property even if we are unable to secure financing for the acquisition. In this event, we may choose to close on the property by using cash on hand, which would result in less cash available for our operations and distributions to stockholders. Alternatively, we may choose not to close on the acquisition of the property and default on the purchase contract. If we default on any purchase contract, we could lose our earnest money and become subject to liquidated or other contractual damages and remedies.

To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective.

From time to time, we may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy. There is no assurance that our hedging strategy will achieve our objectives. We may be subject to costs, such as transaction fees or breakage costs, if we terminate these arrangements.

To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the

 

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counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. If the fair value of a derivative contract is negative, we owe the counterparty, which creates a risk that we may not be able to pay such amounts. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract, increasing the risk that we may not realize the benefits of these instruments. There is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts. The failure of a counterparty that holds collateral that we post in connection with an interest rate swap agreement could result in the loss of that collateral.

There can be no assurance that the direct or indirect effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act will not have an adverse effect on our interest rate hedging activities.

Title VII of the Dodd-Frank Act contains a sweeping overhaul of the regulation of privately negotiated derivatives. The provisions of Title VII became effective on July 16, 2011 or, with respect to particular provisions, on such other date specified in the Dodd-Frank Act or by subsequent rulemaking. Pursuant to the regulatory framework established by Title VII of the Dodd-Frank Act, the Commodity Futures Trading Commission, or the CFTC, has been granted broad regulatory authority over “swaps,” which term has been defined in the Dodd-Frank Act and related CFTC rules to include interest rate derivatives such as the ones we may use in our interest rate hedging activities. While the full impact of the Dodd-Frank Act on our interest rate hedging activities cannot be fully assessed until all final implementing rules and regulations are promulgated, the requirements of Title VII may affect our ability to enter into hedging or other risk management transactions, may increase our costs in entering into such transactions, and/or may result in us entering into such transactions on less favorable terms than prior to effectiveness of the Dodd-Frank Act. For example, subject to an exception for end-users of swaps upon which we may seek to rely, we may be required to clear certain interest rate hedging transactions by submitting them to a derivatives clearing organization. In addition, to the extent we are required to clear any such transactions, we will be required to, among other things, post margin in connection with such transactions. The occurrence of any of the foregoing events may have an adverse effect on our business and our stockholders’ return.

Risks Related to Our Status as REIT

Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation, which would substantially reduce funds available for distributions to our stockholders.

We believe that our organization and proposed method of operation will enable us to meet the requirements for qualification and taxation as a REIT beginning with our short taxable year that commenced on January 5, 2015. However, we cannot assure you that we will qualify and remain qualified as a REIT. In connection with our separation from Inland American, we expect to receive an opinion from Hunton & Williams LLP that, beginning with our short taxable year that commenced on January 5, 2015, we have been organized and operated in conformity with the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws and our current and proposed method of operations will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. federal income tax laws. You should be aware that Hunton & Williams LLP’s opinion is based upon customary assumptions, will be conditioned upon certain representations made by us, Inland American and certain private REITs in which Inland American owns an interest (the “Private REITs”) as to factual matters, including representations regarding the nature of our, Inland American’s and the Private REITs’ assets and the conduct of our, Inland American’s and the Private REITs’ business, is not binding upon the IRS, or any court and speaks as of the date issued. In addition, Hunton & Williams LLP’s opinion will be based on existing U.S. federal income tax law governing qualification as a REIT, which is subject to change either prospectively or retroactively. Moreover, our qualification and taxation as a REIT depend upon our ability to meet on a continuing basis, through actual annual operating results, certain qualification tests set forth in the U.S. federal tax laws. Hunton & Williams LLP will not review our compliance with those tests on a continuing

 

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basis. Accordingly, no assurance can be given that our actual results of operations for any particular taxable year will satisfy such requirements.

If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds available for distributions to our stockholders because:

 

    we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to U.S. federal income tax at regular corporate rates;

 

    we could be subject to the U.S. federal alternative minimum tax and possibly increased state and local taxes; and

 

    unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT.

In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely affect the value of our common stock. See “Material U.S. Federal Income Tax Considerations” for a discussion of material U.S. federal income tax consequences relating to us and our common stock.

If Inland American failed to qualify as a REIT in its 2011 through 2015 taxable years, we would be prevented from electing to qualify as a REIT.

We believe that from the time of our formation until January 5, 2015, we were treated as a “qualified REIT subsidiary” of Inland American. Under applicable Treasury regulations, if Inland American failed, or fails, to qualify as a REIT in its 2011 through 2015 taxable years, unless Inland American’s failure was subject to relief under U.S. federal income tax laws, we would be prevented from electing to qualify as a REIT prior to the fifth calendar year following the year in which Inland American failed to qualify.

If we and Inland American make a tax election that would, among other things, cause us to have a short taxable year that would end immediately before the separation and distribution and we fail to qualify as a REIT for that short taxable year, we would be liable for a material corporate income tax and would be precluded from qualifying as a REIT for the following four taxable years.

We and Inland American may make an election under section 336(e) of the Code, or a section 336(e) election, with respect to the separation and distribution, which would allow us to significantly increase our tax basis in our assets. If that election is made, we would, among other things, be deemed to sell all of our assets to a third party and liquidate immediately before the separation and distribution. Any gain we recognized in that deemed sale that is attributable to the personal property at our hotels would not be qualifying income for purposes of the 75% and 95% gross income tests applicable to REITs. Pursuant to the Separation and Distribution Agreement, Inland American has agreed to make a section 336(e) election upon our request. We will make that request only if we determine that we can satisfy the 75% and 95% gross income tests for our short taxable year that would end immediately before the separation and distribution, taking into account the nonqualifying gain from the deemed sale of our personal property. No complete assurance can be provided that the IRS would not disagree with our valuation of our personal property and our determination of the gain from the deemed sale of that property. If the IRS successfully asserted that we failed to satisfy one or more of the requirements for REIT qualification for our short taxable year ending immediately before the separation and distribution and we did not qualify for one of the REIT “savings clauses,” we would be subject to corporate income tax on the deemed sale of our assets pursuant to the section 336(e) election, and that corporate income tax would be material. In addition, we would be precluded from electing REIT status for the four taxable years following that failure.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as

 

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a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our TRS, and any other TRS we form will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.

Failure to make required distributions would subject us to federal corporate income tax.

We intend to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under the Code.

REIT distribution requirements could adversely affect our liquidity and may force us to borrow funds or sell assets during unfavorable market conditions.

To satisfy the REIT distribution requirements, we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable for these borrowings or sales. Our cash flows from operations may be insufficient to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt service or amortization payments. The insufficiency of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short- and long-term debt or sell equity securities in order to fund distributions required to maintain our qualification as a REIT.

The ownership of our TRS and our TRS lessees increases our overall tax liability.

Our TRS and any other of our domestic TRSs will be subject to U.S. federal, state and local income tax on their taxable income, which will consist of the revenues from the hotels leased by our TRS lessees, net of the operating expenses for such hotels and rent payments to us. Accordingly, although our ownership of our TRS lessees will allow us to participate in the operating income from our hotels in addition to receiving rent, that operating income will be fully subject to income tax. The after-tax net income of our TRS lessees is available for distribution to us. If we have any non-U.S. TRSs, then they may be subject to tax in jurisdictions where they operate.

Our TRS lessee structure subjects us to the risk of increased hotel operating expenses that could adversely affect our operating results and our ability to make distributions to stockholders.

Our leases with our TRS lessees require our TRS lessees to pay us rent based in part on revenues from our hotels. Our operating risks include decreases in hotel revenues and increases in hotel operating expenses, including but not limited to the increases in wage and benefit costs, repair and maintenance expenses, energy costs, property taxes, insurance costs and other operating expenses, which would adversely affect our TRS lessees’ ability to pay us rent due under the leases.

Increases in these operating expenses can have a significant adverse impact on our financial condition, results of operations, the market price of our common shares and our ability to make distributions to our stockholders.

Our ownership of our TRS, and any other TRSs we form, will be subject to limitations and our transactions with our TRS, and any other TRSs we form, will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to

 

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assure that the TRS is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. The 100% tax would apply, for example, to the extent that we were found to have charged our TRS lessees rent in excess of an arm’s-length rent. Furthermore, we will monitor the value of our respective investments in our TRS for the purpose of ensuring compliance with TRS ownership limitations and will structure our transactions with our TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% TRS limitation or to avoid application of the 100% excise tax.

If the leases of our hotels to our TRS lessees are not respected as true leases for U.S. federal income tax purposes, we will fail to qualify as a REIT.

To qualify as a REIT, we must annually satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as “rents from real property.” Rents paid to our operating partnership by our TRS lessees pursuant to the leases of our hotels will constitute substantially all of our gross income. In order for such rent to qualify as “rents from real property” for purposes of the gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, financing arrangements, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we will fail to qualify as a REIT.

If any of our current and future hotel management companies do not qualify as “eligible independent contractors,” or if our hotels are not “qualified lodging facilities,” we will fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by an “eligible independent contractor” and certain other requirements are satisfied. We expect to lease all or substantially all of our hotels to our TRS lessees and to engage hotel management companies that qualify as “eligible independent contractors.” Among other requirements, in order to qualify as an eligible independent contractor, the hotel manager must not own, directly or through its stockholders, more than 35% of our outstanding shares, and no person or group of persons can own more than 35% of our outstanding shares and the shares (or ownership interest) of the hotel manager, taking into account certain ownership attribution rules. The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of our shares by our hotel managers and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded.

In addition, for a hotel management company to qualify as an eligible independent contractor, such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS or its TRS lessee. As of the date hereof, we believe our current hotel managers operate qualified lodging facilities for certain persons who are not related to us or our TRS. However, no assurances can be provided that any of our current and future hotel managers will in fact comply with this requirement. Failure to comply with this requirement would require us to find other managers for future contracts, and, if we hired a management company without knowledge of the failure, it could jeopardize our status as a REIT.

Finally, each property with respect to which our TRS lessees pay rent must be a “qualified lodging facility.” A “qualified lodging facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. As of the date hereof, we believe that the properties that are leased to our TRS lessees are qualified lodging facilities. Although we intend to monitor future acquisitions and improvements of properties, REIT provisions of the Code provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied.

 

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Complying with REIT requirements may force us to forgo and/or liquidate otherwise attractive investment opportunities.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make, and, in certain cases, maintain ownership of, certain attractive investments.

You may be restricted from acquiring or transferring certain amounts of our common stock.

The stock ownership restrictions of the Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our capital stock and restrict our business combination opportunities.

In order to qualify as a REIT for each taxable year after 2016, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year for each taxable year after 2016. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our capital stock.

Our charter authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors (prospectively or retroactively), our charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance is no longer required in order for us to qualify as a REIT.

We may pay taxable dividends in our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

We may distribute taxable dividends that are payable in cash and common stock at the election of each stockholder. If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, stockholders may be required to pay income tax with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the

 

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sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. If we made a taxable dividend payable in cash and our common stock and a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. We do not currently intend to pay a taxable dividend of our common stock and cash.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at individual rates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends treated as qualified dividend income, which could adversely affect the value of the shares of REITs, including our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Code may limit our ability to hedge the risks inherent to our operations. Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk with respect to borrowings made, or to be made, to acquire or carry real estate assets generally will not constitute gross income for purposes of the 75% and 95% income requirements applicable to REITs. In addition, any income from certain other qualified hedging transactions would generally not constitute gross income for purposes of both the 75% and 95% income tests. However, we may be required to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to attempt to, or continue to qualify as a REIT. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return to our stockholders.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Risks Related to Ownership of Our Common Stock and our Corporate Structure

There is currently no public market for our common stock and a trading market that will provide you with adequate liquidity may not develop for our common stock. In addition, once our common stock begins trading, the market price of our shares may fluctuate widely.

There has not been any public market for our common stock prior to the distribution. However, there can be no assurance that an active trading market for our common stock will develop as a result of the distribution or be sustained in the future.

 

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We cannot predict the prices at which our common stock may trade after the distribution, and the value of our stock may be more volatile than the value of Inland American common stock. The market price of our common stock may fluctuate widely, depending on many factors, some of which may be beyond our control, including:

 

    actual or anticipated differences in our operating results, liquidity, or financial condition;

 

    changes in our revenues, Adjusted EBITDA, FFO, Adjusted FFO, or earnings estimates;

 

    publication of research reports about us, our hotels or the lodging or overall real estate industry;

 

    failure to meet analysts’ revenue or earnings estimates;

 

    the extent of institutional investor interest in us;

 

    the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;

 

    additions and departures of key personnel;

 

    the performance and market valuations of other similar companies;

 

    strategic actions by us or our competitors, such as acquisitions or restructurings;

 

    fluctuations in the stock price and operating results of our competitors;

 

    the passage of legislation or other regulatory developments that adversely affect us or our industry;

 

    the realization of any of the other risk factors presented in this information statement;

 

    speculation in the press or investment community;

 

    changes in accounting principles;

 

    terrorist acts; and

 

    general market and economic conditions, including factors unrelated to our operating performance.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.

Because we have a large number of stockholders and our common stock, and the common stock of Inland American, has not been listed on a national securities exchange, there may be significant pent-up demand to sell our shares. Significant sales of our common stock, or the perception that significant sales of such shares could occur, may cause the price of our common stock to decline significantly.

Our common stock, and the common stock of Inland American, has not been listed on any national securities exchange and the ability of stockholders to liquidate their investments has been limited. A large volume of sales of shares of our common stock could decrease the market price of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales of our shares are not affected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our common stock to decline. Furthermore, while we expect to commence a modified “Dutch Auction” tender offer in conjunction with the expected listing of our common stock, such a tender offer has not been approved and there can be no assurances that we will commence or complete such tender offer.

 

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Our common stock may experience low trading volumes and higher trading price volatility due to the composition of our stockholder base immediately following the distribution.

Inland American is a non-publicly-traded REIT held almost exclusively by non-institutional stockholders, and immediately after the distribution, our common stock will be held by such stockholders. Non-institutional stockholders may not trade with the frequency and predictability of institutional stockholders, which may result in low liquidity and trading price volatility.

Future sales or distributions of our common stock, including the sale by Inland American of the shares of our common stock that it retains after the distribution, may negatively affect the market price of our common stock.

The shares of our common stock that Inland American intends to distribute to its stockholders generally may be sold immediately in the public market. Although we have no actual knowledge of any plans or intention on the part of any 5% or greater stockholder to sell our common stock following the distribution, it is possible that some Inland American stockholders, including possibly some of our large stockholders, will sell our common stock received in the distribution. The sales of significant amounts of our common stock or the perception in the market that this will occur may result in the lowering of the market price of our common stock.

In addition, following the distribution, Inland American will retain ownership of approximately 5% of the outstanding shares of our common stock. However, subject to applicable securities laws, Inland American may choose to dispose of some or all of our shares at any time. Any disposition by Inland American, or any significant stockholder, of our common stock in the public market, or the perception that such dispositions could occur, could adversely affect prevailing market prices for our common stock.

Our cash available for distribution to stockholders may not be sufficient to pay distributions at expected or required levels, and we may need external sources in order to make such distributions, or we may not be able to make such distributions at all, which could cause the market price of our common stock to decline significantly.

We intend to pay regular quarterly distributions to holders of our common stock. We have established our initial distribution rate based upon our estimate of the annualized cash flow that will be available for distributions after the separation. All distributions will be made at the discretion of our board of directors and will depend on our historical and projected results of operations, Adjusted EBITDA, FFO, Adjusted FFO, liquidity and financial condition, REIT qualification, debt service requirements, capital expenditures and operating expenses, prohibitions and other restrictions under financing arrangements and applicable law and other factors as our board of directors may deem relevant from time to time. No assurance can be given that our projections will prove accurate or that any level of distributions will be made or sustained or achieve a market yield. We may not be able to make distributions in the future or may need to consider various funding sources to cover any shortfall, including borrowing under our anticipated $400 million unsecured revolving credit facility, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related or debt securities or declaring taxable share dividends. Any of the foregoing could cause the market price of our common stock to decline significantly.

Future issuances of debt securities, which would rank senior to our common stock upon our liquidation, and future issuances of equity securities (including OP Units), which would dilute the holdings of our existing common stockholders and may be senior to our common stock for the purposes of making distributions, periodically or upon liquidation, may negatively affect the market price of our common stock.

In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred shares will receive a distribution of our available assets before common stockholders. If we incur debt in the future, our future interest costs could increase, and adversely affect our liquidity, FFO, Adjusted FFO and results of operations. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities (including OP Units), warrants or options,

 

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will dilute the holdings of our existing common stockholders and such issuances or the perception of such issuances may reduce the market price of our common stock. Our outstanding Series A Preferred Stock has a distribution requirement of $15,625 annually, which is required to be paid or set apart for payment before any distributions on our common stock can be made, and any other preferred stock, if issued, would likely have a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the market price of our common stock.

Your percentage ownership in us may be diluted in the future.

As with any publicly traded company, your percentage ownership in us may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including, without limitation, equity awards that may be granted to our directors officers and employees.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our common stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose viability in the market, which in turn could cause our stock price or trading volume to decline.

Increases in market interest rates may reduce demand for our common stock and result in a decline in the market price of our common stock.

The market price of our common stock may be influenced by the distribution yield on our common stock (i.e., the amount of our annual distributions as a percentage of the market price of our common stock) relative to market interest rates. An increase in market interest rates, which are currently low compared to historical levels, may lead prospective purchasers of our common stock to expect a higher distribution yield, which we may not be able, or may choose not, to provide. Higher interest rates would also likely increase our borrowing costs and decrease our operating results and cash available for distribution. Thus, higher market interest rates could cause the market price of our common stock to decline.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit our stockholders’ recourse in the event of actions not in our stockholders’ best interests.

Under Maryland law generally, a director is required to perform his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Under Maryland law, directors are presumed to have acted in accordance with this standard of conduct. In addition, our charter eliminates the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

 

    actual receipt of an improper benefit or profit in money, property or services; or

 

    active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

Our charter authorizes us to obligate ourselves and our bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any present or former director or officer who is made or threatened to be

 

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made a party to the proceeding by reason of his or her service to us in that capacity. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws.

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:

 

    “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who was the beneficial owner, directly or indirectly, of 10% or more of the voting power of our then outstanding voting stock at any time within the two-year period immediately prior to the date in question) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose fair price and/or supermajority stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that “control shares” of our company (defined as voting shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding control shares) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

As permitted by Maryland law, we have elected, by resolution of our board of directors, to opt out of the business combination provisions of the MGCL, provided that such business combination has been approved by our board of directors (including a majority of directors who are not affiliated with the interested stockholder), and, pursuant to a provision in our bylaws, to exempt any acquisition of our stock from the control share provisions of the MGCL. However, our board of directors may by resolution elect to repeal the exemption from the business combination provisions of the MGCL and may by amendment to our bylaws opt into the control share provisions of the MGCL at any time in the future.

Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to adopt certain mechanisms, some of which (for example, a classified board) we do not have. These provisions may have the effect of limiting or precluding a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we will elect, at such time as we become eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See “Certain Provisions of Maryland Law and of Our Charter and Bylaws.”

Upon the completion of the separation, we will be a holding company with no direct operations and will rely on funds received from our operating partnership to pay liabilities.

Upon the completion of the separation, we will be a holding company and will conduct substantially all of our operations through our operating partnership. We will not have, apart from an interest in our operating partnership, any independent operations. As a result, we will rely on distributions from our operating partnership to pay any dividends we might declare on shares of our common stock. We will also rely on distributions from our operating partnership to meet any of our obligations, including any tax liability on taxable income allocated

 

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to us from our operating partnership. In addition, because we will be a holding company, your claims as stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our operating partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

After the separation, we will own directly or indirectly 100% of the interests in our operating partnership. However, in connection with our future acquisition of properties or otherwise, we may issue OP Units to third parties. Such issuances would reduce our ownership in our operating partnership. Because you will not directly own units of our operating partnership, you will not have any voting rights with respect to any such issuances or other partnership level activities of our operating partnership.

Our charter places limits on the amount of common stock that any person may own.

No more than 50% of the outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year (other than the first taxable year for which an election to be a REIT has been made). Unless exempted by our board of directors, prospectively or retroactively, our charter prohibits any person or group from owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets that might involve a premium price for holders of our common stock.

If anyone transfers shares in a way that would violate the ownership limit, or prevent us from qualifying as a REIT under the U.S. federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the ownership limit. If this transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then the initial intended transfer shall be null and void from the outset. The intended transferee of those shares will be deemed never to have owned the shares. Anyone who acquires shares in violation of the ownership limit or the other restrictions on transfer in our charter bears the risk of suffering a financial loss when the shares are redeemed or sold if the market price of our shares falls between the date of purchase and the date of redemption or sale.

Our charter permits our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

Our board of directors is permitted, subject to certain restrictions set forth in our charter, to authorize the issuance of up to 500,000,000 shares of common stock and 50,000,000 shares of preferred stock without stockholder approval. To facilitate our ability to qualify as a REIT in connection with a potential section 336(e) election, we issued 125 shares of Series A Preferred Stock to 125 individual investors on January 5, 2015. Further, our board may classify or reclassify any unissued shares of common or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms or conditions of redemption of the stock and may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series that we have authority to issue without stockholder approval. Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or shares of preferred stock or common stock that could have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.

 

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Our conflict of interest policy may not be successful in eliminating the influence of future conflicts of interest that may arise between us and our directors, officers and employees.

Effective upon completion of the separation, we intend to adopt a policy that any transaction, agreement or relationship in which any of our directors, officers or employees has a material direct or indirect pecuniary interest must be approved by a majority of our disinterested directors. Other than this policy, however, we may not adopt additional formal procedures for the review and approval of conflict of interest transactions generally. As such, our policies and procedures may not be successful in eliminating the influence of conflicts of interest. See “Investment Policies and Policies with Respect to Certain Activities—Conflict of Interest Policies.”

Conflicts of interest could arise in the future between the interests of our stockholders and the interests of any holders of OP Units in our operating partnership, which may impede business decisions that could benefit our stockholders.

If in the future we have unaffiliated owners of OP Units, conflicts of interest could arise as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to us under applicable Maryland law in connection with their management of our company. At the same time, XHR GP, Inc., our wholly-owned subsidiary, as general partner of our operating partnership, has fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the partnership agreement of our operating partnership in connection with the management of our operating partnership. Our duties as general partner to our operating partnership and its partners may come into conflict with the duties of our directors and officers to our company. These conflicts may be resolved in a manner that is not in the best interests of our stockholders.

Certain provisions in the partnership agreement for our operating partnership may delay or prevent unsolicited acquisitions of us.

If in the future we have unaffiliated owners of OP Units, provisions in the partnership agreement for our operating partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or a change in our control, although some stockholders might consider such proposals, if made, desirable.

Our board of directors may change our investment policies without stockholder approval, which could alter the nature of your investment.

Our investment policies may change over time. The methods of implementing our investment policies may also vary, as new investment techniques are developed. Our investment policies, the methods for implementing them, and our other objectives, policies and procedures may be altered by a majority of the directors without the approval of our stockholders. As a result, the nature of your investment could change without your consent. A change in our investment strategy may, among other things, increase our exposure to interest rate risk, default risk and commercial real property market fluctuations, all of which could materially and adversely affect our ability to achieve our investment objectives.

Our board of directors is expected to approve very broad investment guidelines for us and will not review or approve each investment decision made by our senior management team.

Our senior management team will be authorized by our board of directors to follow broad investment guidelines and, therefore, has great latitude in determining the assets that are proper investments for us, as well as the individual investment decisions. Our senior management team may make investments with lower rates of return than those anticipated under current market conditions and/or may make investments with greater risks to achieve those anticipated returns. Our board of directors will not review or approve each proposed investment by our senior management team.

 

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FORWARD-LOOKING STATEMENTS

This information statement contains forward-looking statements within the meaning of the federal securities laws, All statements, other than statements of historical facts included in this information statement, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, our results of operations, financial position and our business outlook, business trends and other information referred to under “Summary,” “Risk Factors,” “Distribution Policy,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and “Description of Indebtedness” are forward-looking statements. When used in this information statement, the words “estimate,” “anticipate,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “seek,” “approximately” or “plan,” or the negative of these words and phrases, or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions of management.

Forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this information statement. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth above under “Risk Factors,” and the risks and uncertainties related to the following:

 

    business, financial and operating risks inherent to real estate investments and the lodging industry;

 

    seasonal and cyclical volatility in the lodging industry;

 

    macroeconomic and other factors beyond our control that can adversely affect and reduce demand for hotel rooms;

 

    contraction in the global economy or low levels of economic growth;

 

    levels of spending in business and leisure segments as well as consumer confidence;

 

    declines in occupancy and average daily rate;

 

    fluctuations in the supply and demand for hotel rooms;

 

    changes in the competitive environment in lodging industry and the markets where we own hotels;

 

    events beyond our control, such as war, terrorist attacks, travel-related health concerns and natural disasters;

 

    our reliance on third-party hotel management companies to operate and manage our hotels;

 

    our ability to maintain good relationships with our third-party hotel management companies and franchisors;

 

    our failure to maintain brand operating standards;

 

    our ability to maintain our brand licenses at our hotels;

 

    relationships with labor unions and changes in labor laws;

 

    loss of our senior management team or key personnel;

 

    our ability to identify and consummate acquisitions of additional hotels;

 

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    our ability to integrate and successfully operate any hotel properties acquired in the future and the risks associates with these hotel properties;

 

    the impact of hotel renovations, repositionings, redevelopments and re-branding activities;

 

    our ability to access capital for renovations and acquisitions on terms and at times that are acceptable to us;

 

    the fixed cost nature of hotel ownership;

 

    our ability to service our debt;

 

    changes in interest rates and operating costs;

 

    compliance with regulatory regimes and local laws;

 

    uninsured or underinsured losses, including those relating to natural disasters or terrorism;

 

    changes in distribution channels, such as through internet travel intermediaries;

 

    our status as an emerging growth company;

 

    the amount of debt that we currently have or may incur in the future;

 

    provisions in our debt agreements that may restrict the operation of our business;

 

    our separation from Inland American and our ability to operate as a stand-alone public company;

 

    potential business conflicts of interests with Inland American;

 

    our organizational and governance structure;

 

    our status as a REIT;

 

    our TRS lessee structure;

 

    the cost of compliance with and liabilities under environmental, health and safety laws;

 

    adverse litigation judgments or settlements;

 

    changes in real estate and zoning laws and increase in real property tax rates;

 

    changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs;

 

    changes in governmental regulations or interpretations thereof; and

 

    estimates relating to our ability to make distributions to our stockholders in the future.

 

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OUR SEPARATION FROM INLAND AMERICAN

General

The board of directors of Inland American determined upon careful review and consideration that the separation of our assets from the rest of Inland American and the establishment of us as a separate, publicly-traded company was in the best interest of Inland American.

In furtherance of this plan, Inland American will distribute 95% of the outstanding shares of our common stock held by Inland American to holders of Inland American common stock, subject to certain conditions. The distribution of our common stock is expected to take place on             , 2015. On the distribution date, each holder of Inland American common stock will receive one share for every eight shares of Inland American common stock held at the close of business on the distribution record date, as described below. You will not be required to make any payment, surrender or exchange your shares of Inland American common stock or take any other action to receive your shares of our common stock to which you are entitled on the distribution date.

The distribution of our common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. We cannot provide any assurances that the distribution will be completed. For a more detailed description of these conditions, see the section entitled “Conditions to the Distribution.”

The Number of Shares You Will Receive

For every eight shares of Inland American common stock that you owned at the close of business on             , 2015, the distribution record date, you will receive one share of our common stock on the distribution date.

Transferability of Shares You Receive

The shares of Xenia common stock distributed to Inland American stockholders will be freely transferable, except for shares received by persons who may be deemed to be our “affiliates” under the Securities Act. Persons who may be deemed to be our affiliates after the separation generally include individuals or entities that control, are controlled by or are under common control with us and may include directors and certain officers or principal stockholders of us. Our affiliates will be permitted to sell their shares of Xenia common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Rule 144.

When and How You Will Receive the Distributed Shares

Inland American will distribute the shares of our common stock on             , 2015, the distribution date. DST Systems, Inc. will serve as distribution agent, transfer agent and registrar for our common stock and as distribution agent in connection with the distribution.

If you own Inland American common stock as of the close of business on the distribution record date, the shares of Xenia common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you or to your bank or brokerage firm on your behalf by way of direct registration in book-entry form. Registration in book-entry form refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as is the case in the distribution.

Commencing on or shortly after the distribution date, if you hold your shares in book-entry form and you are the registered holder of such shares, the distribution agent will mail to you an account statement that indicates the number of shares of our common stock that have been registered in book-entry form in your name, or your bank or brokerage firm will credit your account for the shares.

 

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Treatment of Fractional Shares

The distribution agent will not deliver any fractional shares in connection with the delivery of our common stock pursuant to the separation. Instead, the distribution agent will aggregate all fractional shares and sell them on behalf of those stockholders who otherwise would be entitled to receive fractional shares. These sales will occur as soon as practicable after the distribution date. Those stockholders will then receive a cash payment, in the form of a check, in an amount equal to their pro rata share of the total proceeds of those sales, net of brokerage fees.

The receipt of cash in lieu of fractional shares will generally be taxable to the recipient stockholder. See “Our Separation from Inland American—Certain Material U.S. Federal Income Tax Consequences of the Separation.”

Results of the Separation

After the separation, we will be a separate, publicly-traded company. Immediately following the distribution, we expect to have approximately 171,902 stockholders of record, based on the number of registered stockholders of Inland American common stock on December 29, 2014, and             shares of our common stock outstanding. The actual number of shares to be distributed will be determined on the distribution record date and will reflect any changes in the number of shares of Inland American common stock between December 29, 2014 and the distribution record date.

We will enter into a Separation and Distribution Agreement to effect the separation and distribution. In addition, we will enter into various other agreements with Inland American to effect the separation and provide a framework for our relationship with Inland American after the separation, such as a Transition Services Agreement and an Employee Matters Agreement. These agreements will provide for the allocation between us and Inland American of Inland American’s assets, liabilities and obligations (including its properties, employees and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from Inland American and will govern certain relationships between us and Inland American after the separation. For a more detailed description of these agreements, see the section entitled “Certain Relationships and Related Transactions.”

The distribution will not affect the number of outstanding shares of Inland American common stock or any rights of Inland American stockholders.

Certain Material U.S. Federal Income Tax Consequences of the Separation

The following is a summary of the material U.S. federal income tax consequences of the separation, and in particular the distribution by Inland American of shares of our common stock to stockholders of Inland American. For purposes of this section under the heading “Certain Material U.S. Federal Income Tax Consequences of the Separation”: (1) any references to the “separation” shall mean only the distribution of our common stock by Inland American to stockholders of Inland American; (2) references to “Xenia,” “we,” “our” and “us” mean only Xenia and not its subsidiaries or other lower-tier entities, except as otherwise indicated; and (3) references to Inland American refer to Inland American Real Estate Trust, Inc. This summary is based upon the Code, the regulations promulgated by the U.S. Treasury Department, rulings and other administrative pronouncements issued by the IRS, and judicial decisions, all as currently in effect, and all of which are subject to differing interpretations or to change, possibly with retroactive effect. No assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences described below. We have not sought and do not intend to seek an advance ruling from the IRS regarding any matter discussed herein. The summary is also based upon the assumption that Inland American, Xenia and their respective subsidiaries and affiliated entities will operate in accordance with their applicable organizational documents or partnership agreements and the agreements and other documents applicable to the separation. This

 

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summary is for general information only and is not tax advice. The Code provisions governing the U.S. federal income tax treatment of REITs (such as Inland American and Xenia) and their stockholders are highly technical and complex, and this summary is qualified in its entirety by the express language of applicable Code provisions, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof. This summary does not address all possible tax considerations that may be material to a stockholder and does not constitute legal or tax advice. Moreover, this summary does not purport to discuss all aspects of U.S. federal income taxation that may be important to a particular stockholder in light of its investment or tax circumstances, or to stockholders subject to special tax rules, such as:

 

    financial institutions;

 

    insurance companies;

 

    broker-dealers;

 

    regulated investment companies;

 

    foreign sovereigns and their controlled entities;

 

    partnerships and trusts;

 

    persons who will hold Inland American common stock on behalf of other persons as nominees;

 

    persons who received Inland American common stock through the exercise of employee stock options or otherwise as compensation;

 

    persons who will hold Inland American common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment; and

 

    except to the extent discussed below, tax-exempt organizations and foreign investors.

This summary assumes that stockholders will hold their Inland American common stock as a capital asset for U.S. federal income tax purposes, which generally means as property held for investment.

For purposes of this discussion under the heading “Certain U.S. Federal Income Tax Consequences of the Separation,” a “U.S. stockholder” is a beneficial owner of Inland American common stock that is for federal income tax purposes:

 

    a citizen or resident of the United States;

 

    a corporation (including an entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any of its states, or the District of Columbia;

 

    an estate whose income is subject to U.S. federal income taxation regardless of its source; or

 

    a trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.

A “non-U.S. stockholder” is a beneficial owner of Inland American common stock that is neither a U.S. stockholder nor a partnership (or other entity treated as a partnership) for U.S. federal income tax purposes. If a partnership, including for this purpose any entity that is treated as a partnership for U.S. federal income tax purposes, holds Inland American common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A stockholder that is a partnership and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of the separation.

 

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THE U.S. FEDERAL INCOME TAX TREATMENT OF THE SEPARATION TO STOCKHOLDERS OF INLAND AMERICAN DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF THE SEPARATION TO ANY PARTICULAR STOCKHOLDER OF INLAND AMERICAN WILL DEPEND ON THE STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO YOU OF THE SEPARATION IN LIGHT OF YOUR PARTICULAR INVESTMENT OR TAX CIRCUMSTANCES.

Tax Classification of the Separation in General

For U.S. federal income tax purposes, the separation will not be eligible for treatment as a tax-deferred distribution by Inland American with respect to its stock. Accordingly, the separation will be treated as if Inland American had distributed to each Inland American stockholder in an amount equal to the fair market value of the Xenia common stock received by such stockholder (including any fractional share deemed received by the stockholder, as described below), determined as of the date of the separation. We refer to such amount as the “separation distribution amount.” The tax consequences of the separation to Inland American’s stockholders are thus generally the same as the tax consequences of Inland American’s cash distributions. The discussion below describes the U.S. federal income tax consequences to a U.S. stockholder, a non-U.S. stockholder, and a tax-exempt stockholder of Inland American common stock upon the receipt of Xenia common stock in the separation.

Although Inland American will ascribe a value to the Xenia common stock distributed in the separation, this valuation is not binding on the IRS or any other tax authority. These taxing authorities could ascribe a higher valuation to the distributed Xenia common stock, particularly if, following the separation, those shares of common stock trade at prices significantly above the value ascribed to those shares by Inland American. Such a higher valuation may affect the distribution amount and thus the tax consequences of the separation to Inland American’s stockholders.

Any cash received by an Inland American stockholder in lieu of a fractional share of the Xenia common stock should be treated as if such fractional share had been (i) received by the stockholder as part of the separation and then (ii) sold by such stockholder, via the distribution agent, for the amount of cash received. As described below, the basis of the fractional share deemed received by an Inland American stockholder will equal the fair market value of such share on the date of the separation, and the amount paid in lieu of a fractional share will be net of the distribution agent’s brokerage fees.

We and Inland American may make a section 336(e) election with respect to the separation and distribution. If that election is made, our tax basis in our assets would be stepped up to their fair market value on the date of the distribution. The increased tax basis in our assets would increase the depreciation deductions we are allowed to claim, which would decrease the portion of our distributions that would be taxable as dividend income to our stockholders.

The section 336(e) election, if made, would cause us and Inland American to be deemed for tax purposes to engage in a number of transactions immediately prior to the distribution. Among other transactions, we would be deemed to sell all of our assets to a third party and liquidate. To facilitate our ability to qualify as a REIT for our taxable year that would end with that liquidating distribution, we issued 125 shares of Series A Preferred Stock on January 5, 2015. However, we are still evaluating whether we would be able to qualify as a REIT for that short taxable year. Pursuant to the Separation and Distribution Agreement, Inland American has agreed to make a section 336(e) election upon our request. We will make that request only if we determine we would qualify as a REIT for that short taxable year.

 

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As a result of the deemed sale and liquidation caused by the section 336(e) election, Inland American, as the holder of 100% of the outstanding shares of our common stock prior to the distribution, would be deemed to receive a taxable liquidating distribution that would include an amount of gain equal to the difference between the fair market value of our assets on the distribution date and our adjusted tax basis in those assets. We anticipate that Inland American would recognize a significant amount of gain as a result of the separation and distribution. Without the section 336(e) election, Inland American would recognize less gain on the separation and distribution, because it would recognize only the gain on the 95% of the common stock that will be distributed in the distribution and separation, rather than the gain from the deemed sale of 100% of our assets. No assurance can be made regarding whether we and Inland American will make the section 336(e) election.

Tax Basis and Holding Period of Xenia Common Stock Received by Holders of Inland American Common Stock

An Inland American stockholder’s tax basis in shares of Xenia common stock received in the separation (including any fractional share deemed received by the stockholder, as described below) generally will equal the fair market value of such shares on the date of the separation, and the holding period for such shares will begin the day after the date of the separation.

Tax Treatment of the Separation to U.S. Stockholders

The following discussion describes the U.S. federal income tax consequences to a U.S. stockholder upon the receipt of shares of Xenia common stock in the separation.

Ordinary Dividend Distributions

The portion of the separation distribution amount received by a U.S. stockholder that is payable out of Inland American’s current or accumulated earnings and profits and that is not designated by Inland American as a capital gain dividend will generally be taken into account by such U.S. stockholder as ordinary income and will not be eligible for the dividends received deduction for corporations. With limited exceptions, dividends paid by Inland American are not eligible for taxation at the preferential income tax rates for qualified dividend income received by U.S. stockholders taxed at individual rates from taxable C corporations. Such U.S. stockholders, however, are taxed at the preferential rates on dividends designated by and received from a REIT, such as Inland American, to the extent that the dividends are attributable to dividends received by the REIT from TRSs or other taxable C corporations.

Capital Gain Dividend Distributions

A distribution that Inland American designates as a capital gain dividend will generally be taxed to U.S. stockholders as long-term capital gain, to the extent that such distribution does not exceed Inland American’s actual net capital gain for the taxable year, without regard to the period for which the holder that receives such distribution has held its Inland American common stock. Corporate U.S. stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. Long-term capital gains are generally taxable at reduced maximum federal rates in the case of U.S. stockholders that are taxed at individual rates, and ordinary income rates in the case of stockholders that are corporations.

Non-Dividend Distributions

A distribution to U.S. stockholders in excess of Inland American’s current and accumulated earnings and profits will generally represent a return of capital and will not be taxable to a U.S. stockholder to the extent that the amount of such distribution does not exceed the adjusted basis of the holder’s Inland American common stock in respect of which the distribution was made. Rather, the distribution will reduce the U.S. stockholder’s

 

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adjusted tax basis in its Inland American common stock. To the extent that such distribution exceeds a U.S. stockholder’s adjusted tax basis in its Inland American common stock, the holder generally must include such distribution in income as long-term capital gain, or short-term capital gain if the holder’s Inland American common stock has been held for one year or less.

Tax Treatment of the Separation to Non-U.S. Stockholders

The following discussion describes the U.S. federal income tax consequences to a non-U.S. stockholder upon the receipt of shares of Xenia common stock in the separation.

Ordinary Dividend Distributions

The portion of the separation distribution amount received by a non-U.S. stockholder that is (1) payable out of Inland American’s earnings and profits, (2) not attributable to Inland American’s capital gains, and (3) not effectively connected with a U.S. trade or business of the non-U.S. stockholder, will be treated as a dividend that is subject to U.S. withholding tax at the rate of 30%, unless reduced or eliminated by treaty.

In general, non-U.S. stockholders will not be considered to be engaged in a U.S. trade or business solely as a result of their ownership of Inland American common stock. In cases where the dividend income from a non-U.S. stockholder’s investment in Inland American common stock is, or is treated as, effectively connected with the non-U.S. stockholder’s conduct of a U.S. trade or business, the non-U.S. stockholder generally will be subject to U.S. federal income tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends. Such income must generally be reported on a U.S. income tax return filed by or on behalf of the non-U.S. stockholder. The income may also be subject to the 30% branch profits tax in the case of a non-U.S. stockholder that is a corporation.

Capital Gain Distributions

Under the Foreign Investment in Real Property Tax Act of 1980, or FIRPTA, distributions that are attributable to gain from Inland American’s sales or exchanges of United States real property interests, or USRPIs, will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a U.S. trade or business, and non-U.S. stockholders will be subject to U.S. federal income tax on the distributions at the rates applicable to U.S. individuals or corporations. Inland American will be required to withhold a 35% tax on such distributions. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a corporate non-U.S. stockholder. It is anticipated that a portion of the separation distribution amount will be capital gain from the disposition of USRPIs.

Distributions received by a non-U.S. stockholder that are attributable to dispositions of Inland American’s assets other than USRPIs are not subject to U.S. federal income tax, unless (1) the gain is effectively connected with the non-U.S. stockholder’s U.S. trade or business, in which case the non-U.S. stockholder would be subject to the same treatment as U.S. stockholders with respect to such gain, or (2) the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, in which case the non-U.S. stockholder will incur a 30% tax on his capital gains.

Non-Dividend Distributions

Unless Inland American’s common stock constitutes a USRPI, the separation distribution amount, to the extent not made out of Inland American’s earnings and profits, and not attributable to gain from the disposition of USRPIs (including gain realized in the separation distribution), will not be subject to U.S. federal income tax. If Inland American cannot determine at the time of the separation whether the separation distribution amount will exceed its current and accumulated earnings and profits, the separation distribution will be subject to withholding at the rate applicable to ordinary dividends, as described above.

 

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If Inland American’s stock constitutes a USRPI, a determination made as described below, distributions that it makes in excess of the sum of (1) the non-U.S. stockholder’s proportionate share of Inland American’s earnings and profits, plus (2) the non-U.S. stockholder’s basis in its Inland American common stock, will be taxed under FIRPTA in the same manner as if the Inland American stock had been sold. In such situations, Inland American would be required to withhold 10% of such excess, the non-U.S. stockholder would be required to file a U.S. federal income tax return, and the non-U.S. stockholder would be subject to the same treatment and same tax rates as a U.S. stockholder with respect to such excess, subject to applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals.

Inland American’s common stock will not be treated as a USRPI if less than 50% of Inland American’s assets throughout a prescribed testing period consist of interests in real property located within the United States, excluding, for this purpose, interests in real property solely in a capacity as a creditor. More than 50% of the value of Inland American’s assets consist of USRPI during the relevant period.

Inland American’s common stock nonetheless will not constitute a USRPI if Inland American is a “domestically controlled qualified investment entity.” A domestically controlled qualified investment entity includes a REIT, less than 50% of value of which is held directly or indirectly by non-U.S. stockholders at all times during a specified testing period. It is anticipated that Inland American will be a domestically controlled qualified investment entity at the time of the separation distribution, and that a distribution with respect to Inland American’s stock in excess of Inland American’s earnings and profits will not be subject to withholding taxation under FIRPTA. No complete assurance can be given that Inland American will qualify as a domestically controlled qualified investment entity at the time of the separation distribution.

Gain in respect of a non-dividend distribution that would not otherwise be subject to FIRPTA will nonetheless be taxable in the United States to a non-U.S. stockholder in two cases: (1) if the non-U.S. stockholder’s investment in Inland American common stock is effectively connected with a U.S. trade or business conducted by such non-U.S. stockholder, the non-U.S. stockholder will be subject to the same treatment as a U.S. stockholder with respect to such gain; or (2) if the non-U.S. stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a “tax home” in the United States, the nonresident alien individual will be subject to a 30% tax on the individual’s capital gain.

Withholding of Amounts Distributable to Non-U.S. Stockholders in the Separation

If Inland American is required to withhold any amounts otherwise distributable to a non-U.S. stockholder in the separation, Inland American or other applicable withholding agents will collect the amount required to be withheld by reducing to cash for remittance to the IRS a sufficient portion of shares of Xenia common stock that such non-U.S. stockholder would otherwise receive, and such holder may bear brokerage or other costs for this withholding procedure. A non-U.S. stockholder may seek a refund from the IRS of any amounts withheld if it is subsequently determined that the amounts withheld exceeded the non-U.S. stockholder’s U.S. tax liability for the year in which the separation occurred.

Time for Determination of the Tax Impact of the Separation

The tax consequences of the separation will be affected by a number of facts that are yet to be determined, including Inland American’s final earnings and profits for 2015 (including as a result of the income and gain Inland American recognizes in connection with the separation), the fair market value of shares of Xenia common stock on the date of the separation and the extent to which Inland American recognizes gain on the sales of USRPIs or other capital assets. Thus, a definitive calculation of the U.S. federal income tax consequences of the separation will not be possible until after the end of the 2015 calendar year. Inland American will provide its stockholders with tax information on an IRS Form 1099-DIV, informing them of the character of distributions made during the taxable year, including the separation.

 

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Market for Common Stock

There is currently no public market for our common stock. A condition to the distribution is the listing on the NYSE of our common stock. We have applied to list our common stock on the NYSE under the symbol “XHR.”

Conditions to the Distribution

The distribution of our common stock by Inland American is subject to the satisfaction of the following conditions:

 

    the board of directors of Inland American shall have authorized the distribution, which authorization may be made or withheld in the Inland American board’s sole and absolute discretion;

 

    our registration statement on Form 10, of which this information statement is a part, shall have become effective under the Exchange Act, and no stop order relating to the registration statement shall be in effect and no proceedings for such purpose shall be pending before, or threatened by, the SEC;

 

    Xenia’s common stock will have been approved for listing on the NYSE, subject to official notice of issuance;

 

    no preliminary or permanent injunction or other order, decree, or ruling issued by a governmental authority, and no statute (as interpreted through orders or rules of any governmental authority duly authorized to effectuate the statute), rule, regulation or executive order promulgated or enacted by any governmental authority shall be in effect preventing the consummation of, or materially limiting the benefits of, the separation and distribution and other transaction contemplated thereby;

 

    the receipt of all necessary consents and approvals from lenders, lessors, managers and franchisors;

 

    any required actions and filings necessary or appropriate under federal or state securities and blue sky laws of the U.S. will have been taken;

 

    the receipt by Xenia of an opinion from Hunton & Williams LLP to the effect that, beginning with Xenia’s short taxable year that commenced on January 5, 2015, Xenia has been organized and operated in conformity with the requirements for qualification as a REIT under the Code, and its current and proposed method of operation will enable it to satisfy the requirements for qualification and taxation as a REIT;

 

    the Transition Services Agreement and the Employee Matters Agreement shall have been executed and delivered by each of the parties thereto and no party to any of such agreements shall be in material breach of any such agreement;

 

    the effectiveness of the amendment and restatement of Xenia’s charter and bylaws;

 

    the executive officers and directors of Xenia shall be as set forth in this information statement;

 

    Xenia and the applicable lenders shall have executed a definitive Credit Agreement related to the $400 million unsecured revolving credit facility;

 

    Inland American shall have made the Capital Contribution and an additional capital contribution of $16.0 million;

 

    Xenia shall have a minimum cash balance of at least $50.0 million at the time of separation;

 

    the existing revolving credit facility of Inland American shall have been terminated and Inland American shall have entered into a new credit facility upon the terms and with such lenders as it shall determine in its sole discretion;

 

   

no event or development shall have occurred or failed to occur that, in the judgment of the board of directors of Inland American, in its sole discretion, prevents the consummation of the separation and

 

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distribution and related transactions or any portion thereof or makes the consummation of such transactions inadvisable;

 

    any government approvals and other material consents necessary to consummate the distribution will have been obtained and be in full force and effect; and

 

    the Separation and Distribution Agreement will not have been terminated.

Even if all conditions to the distribution are satisfied, Inland American may terminate and abandon the distribution at any time prior to the effectiveness of the distribution.

Reasons for the Separation

Upon careful review and consideration in accordance with the applicable standard of review under Maryland law, Inland American’s board of directors determined that our separation from Inland American is in the best interests of Inland American. The board’s determination was based on a number of factors, including those set forth below.

 

    Create two separate, focused companies executing distinct business strategies. Historically, Inland American has focused on acquiring and developing a diversified portfolio of commercial real estate located in a broad range of geographic regions throughout the United States. As a result, Inland American’s investors have had exposure to a diversified portfolio across several different real estate asset classes, such as multi-tenant retail, lodging, student housing, net lease, office, industrial, and multi-family. Its lodging assets have been managed by a dedicated management team and held in a focused subsidiary since we were formed in 2007. Over the past two years, Inland American has been focusing its diversified portfolio into three specific asset classes – multi-tenant retail, lodging and student housing. By separating its premium full service, lifestyle and urban upscale hotel portfolio into a standalone hotel company, investors will be invested in two separate platforms with dedicated and focused management teams. The Suburban Select Service Portfolio was sold on November 17, 2014 to unaffiliated third party purchasers for approximately $1.1 billion.

 

    Allow Inland American’s management to focus on its retained asset classes, while enabling our dedicated management to focus solely on Xenia’s premium full service, lifestyle and urban upscale hotel portfolio and make decisions solely based on Xenia’s business objectives and strategic plan. The separation of the premium full service, lifestyle and urban upscale hotel portfolio from Inland American will allow Inland American’s management to solely focus on its multi-tenant retail and student housing asset classes and the needs of these segments. Similarly, the separation will enable our dedicated management team to focus solely on Xenia’s premium full service, lifestyle and urban upscale hotel portfolio and make decisions solely based on our business objectives and strategic goals. As a pure play lodging company, we believe that we will be well-positioned to grow our business through operational flexibility, efficient deployment of resources and quick decision-making based solely on the needs of our business.

 

    Market recognition of the value of our business. As a stand-alone company, we will be focused solely on premium full service, lifestyle and urban upscale hotels, making us an attractive investment opportunity for REIT investors looking for exposure to this asset class. We will also benefit from having the ability to use shares of our common stock or OP Units as acquisition currency, which will improve our competitive positioning as we grow.

 

    Provide liquidity to Inland American stockholders. Unlike shares of common stock of Inland American, shares of our common stock are expected to be listed on the NYSE and will be publicly tradeable. As a result, by distributing shares of our common stock to Inland American’s existing stockholders, such stockholders will be able to make their own investment decisions with respect to the shares of common stock that they own. Additionally, as a result of having a publicly traded market for our stock, new investors will have the opportunity to invest in our company.

 

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    More efficient capital allocation and direct access to capital markets. As a separate public company, we will have direct access to the capital markets to issue equity or debt securities, and will have the flexibility to create a more diverse capital structure tailored to our strategic goals designed to maximize stockholder value. Additionally, our common stock, and possibly our OP Units, can be used to facilitate our growth through acquisitions and strategic partnerships after the distribution and may become an important acquisition currency.

The anticipated benefits of the separation are based on a number of assumptions, and there can be no assurance that such benefits will materialize to the extent anticipated, or at all. In the event that the separation does not result in such benefits, the costs associated with the separation could have a material adverse effect on each company individually and in the aggregate. For more information about the risks associated with the separation, see “Risk Factors – Risks Related to Our Relationship with Inland American and the Separation.”

Reasons for Furnishing this Information Statement

This information statement is being furnished solely to provide information to Inland American stockholders who are entitled to receive shares of our common stock in the distribution. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell any of our securities or securities of Inland American. We believe that the information in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither Inland American nor we undertake any obligation to update such information.

 

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DISTRIBUTION POLICY

We anticipate making regular quarterly distributions to our stockholders. Assuming a distribution ratio of one share of Xenia common stock for every eight shares of Inland American common stock, we intend to pay a pro rata initial dividend with respect to the period beginning on the completion of the separation and distribution and ending March 31, 2015 based on a dividend of $0.23 per share for a full quarter. On an annualized basis, this would be $0.92 per share of common stock. We expect that the cash required to fund our dividends will be covered by cash generated by operations.

To qualify as a REIT, we must distribute to our stockholders an amount at least equal to:

 

  i. 90% of our REIT taxable income, determined before the deduction for dividends paid and excluding any net capital gain (which does not necessarily equal net income as calculated in accordance with GAAP); plus

 

  ii. 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code; less

 

  iii. any excess non-cash income (as determined under the Code). Please refer to “Material U.S. Federal Income Tax Consequences.”

Distributions made by us will be authorized and determined by our board of directors, in its sole discretion, out of legally available funds, and will be dependent upon a number of factors, including our actual and projected results of operations, financial condition, cash flows and liquidity, our qualification as a REIT and other tax considerations, capital expenditures and other obligations, debt covenants, contractual prohibitions or other limitations under applicable law and other such matters as our board of directors may deem relevant from time to time. We cannot assure you that our distribution policy will remain the same in the future, or that any estimated distributions will be made or sustained.

Our ability to make distributions to our stockholders will depend upon the performance of our asset portfolio. Distributions will be made in cash to the extent cash is available for distribution. We may not be able to generate sufficient cash flows to pay distributions to our stockholders. To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Code, we may consider various funding sources to cover any shortfall, including borrowing under our anticipated $400 million unsecured revolving credit facility, selling certain of our assets or using a portion of the net proceeds we receive from future offerings of equity, equity-related or debt securities or declaring taxable share dividends. In addition, our charter allows us to issue preferred stock that could have a preference over our common stock as to distributions. The terms of our Series A Preferred Stock provide that we may not pay dividends on our common stock unless full cumulative dividends for all prior dividend periods have been or contemporaneously are paid or declared on all outstanding shares of Series A Preferred Stock. We currently have no intention to issue any preferred stock other than the Series A Preferred Stock currently issued and outstanding, but if we do, the distribution preference on the preferred stock could limit our ability to make distributions to the holders of our common stock. In addition, our board of directors could change our distribution policy in the future. See “Risk Factors.”

Distributions to our stockholders will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. See “Material U.S. Federal Income Tax Consequences.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2014 on a pro forma basis, adjusted to:

 

    reflect the business and operations of the Company after the consummation of the Reorganization Transactions and immediately following the completion of the separation of the Company from Inland American, when we will own solely the Xenia Portfolio;

 

    exclude the Suburban Select Service Portfolio to the extent it is reflected as held for sale on the Company’s balance sheet as of September 30, 2014;

 

    exclude one hotel sold on May 30, 2014, one hotel sold on August 28, 2014 and one hotel sold on December 31, 2014;

 

    reflect the Capital Contribution;

 

    reflect the issuance of 125 shares of Series A Preferred Stock;

 

    reflect the repayment of approximately $84.0 million of borrowings outstanding under existing mortgage indebtedness, funded by Inland American;

 

    reflect an additional capital contribution of $16.0 million, all of which the Company intends to use to paydown existing mortgage indebtedness in 2015;

 

    reflect a non-cash capital contribution of $86.8 million to settle the Company’s allocated share of Inland American’s unsecured credit facility;

 

    reflect the Company’s entry into the intended new $400 million unsecured revolving credit facility;

 

    reflect the issuance of 113,396,997 shares of our common stock to Inland American pursuant to a stock dividend prior to the distribution; and

 

    reflect the distribution of 107,728,098 shares of our common stock to holders of Inland American common stock based upon the number of Inland American shares outstanding on             , 2015 and 5,669,899 shares retained by Inland American.

The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had the separation, distribution, capital contribution and related financing transactions been completed as of September 30, 2014. In addition, it is not indicative of our future cash and cash equivalents and capitalization. This table is derived from and is qualified entirely by reference to, our historical and pro forma financial statements and the accompanying notes included elsewhere in this information statement, and should be read in conjunction with the sections entitled “Selected Combined Consolidated Historical Financial and Operating Data,” “Unaudited Pro Forma Combined Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined consolidated historical and pro forma financial statements and related notes included elsewhere in this information statement.

 

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    Xenia Portfolio  
    Pro Forma, As Adjusted  
    As of September 30, 2014  
    (amounts in thousands, except
shares and per share data)
 

Cash and cash equivalents

    266,977 (1) 

Restricted cash and escrows

    105,296   

Total

  $ 372,273   
 

 

 

 

Total Debt:

    1,166,780   

Stockholders’ equity:

 

Common stock, $0.01 par value per share; 500,000,000 shares authorized; 113,397,997 shares issued and outstanding

    1,134   

Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; 125 shares issued and outstanding

    0   

Additional paid-in capital

    1,989,781   

Retained earnings (accumulated distributions in excess of net loss)

    (189,692

Total stockholders’ equity

    1,801,223   

Total capitalization

  $ 2,968,003   
 

 

 

 

 

(1) Upon our separation from Inland American, in addition to the Capital Contribution and the additional capital contribution of $16.0 million, we expect to have a minimum of approximately $50 million of cash on hand, before payment of fees and expenses related to the separation and certain other costs as described in “Certain Relationships and Related Transactions—Agreements with Inland American—Separation and Distribution Agreement.” Cash in excess of this amount may be distributed to Inland American in Inland American’s sole discretion, pursuant to the Separation and Distribution Agreement.

 

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SELECTED HISTORICAL COMBINED CONSOLIDATED FINANCIAL DATA

The following historical combined consolidated financial data as of December 31, 2013, 2012 and 2011 and for the years then ended have been derived from our audited combined consolidated financial statements, included elsewhere in this information statement. The historical financial data as of and for the nine months ended September 30, 2014 and 2013 have been derived from our unaudited condensed, combined consolidated interim financial statements included elsewhere in this information statement.

Our financial statements reflect the operations of the Prior Combined Portfolio, which, among other things, classifies the Suburban Select Service Portfolio as held for sale with the related results from operations reported as discontinued operations, and include allocations of costs from certain corporate and shared functions provided to us by Inland American, as well as costs associated with participation by certain of our executives in Inland American’s benefit plans. The allocation methods for corporate and shared services costs vary by function but were generally based on historical costs of assets or headcount.

Because the historical financial statements represent the financial data of the Prior Combined Portfolio, and the Company will own solely the Xenia Portfolio following the separation from Inland American, the historical financial statements included in this information statement do not reflect our financial position, results of operations and cash flows as if we had operated as a stand-alone public company during the periods presented owning solely the Xenia Portfolio. Accordingly, our historical results should not be relied upon as an indicator of future performance.

The selected pro forma combined consolidated financial and operating data for the Xenia Portfolio is derived from our unaudited pro forma combined consolidated financial statements as of September 30, 2014 and for the nine months then ended as well as our unaudited pro forma statement of income for the year ended December 31, 2013, included elsewhere in this information statement. We derived our unaudited pro forma combined consolidated financial statements by applying pro forma adjustments to our historical combined consolidated financial statements included elsewhere in this information statement. The pro forma combined consolidated financial and operating data give effect to:

 

    the consummation of the Reorganization Transactions, after which we will own solely the Xenia Portfolio;

 

    the exclusion of the Suburban Select Service Portfolio to the extent it is reflected as held for sale on the Company’s balance sheet as of September 30, 2014;

 

    the Capital Contribution;

 

    the issuance of 125 shares of Series A Preferred Stock;

 

    the repayment of approximately $84.0 million of borrowings outstanding under existing mortgage indebtedness, funded by Inland American;

 

    reflect an additional capital contribution of $16.0 million, all of which the Company intends to use to paydown existing mortgage indebtedness in 2015;

 

    a non-cash capital contribution of $86.8 million to settle the Company’s allocated share of Inland American’s unsecured credit facility;

 

    the entry into the Company’s new $400 million unsecured revolving credit facility;

 

    the issuance of 113,396,997 shares of our common stock to Inland American pursuant to a stock dividend prior to the distribution;

 

    the distribution of 107,728,098 shares of our common stock to holders of Inland American common stock based upon the number of Inland American shares outstanding on             , 2015 and 5,669,899 shares retained by Inland American; and

 

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    certain other adjustments as described in “Unaudited Pro Forma Combined Consolidated Financial Statements.”

In addition, the unaudited pro forma combined consolidated statements of operations and other financial and operating data:

 

    reflect the consummation of the acquisition of the Aston Waikiki Beach Hotel (which the Company acquired on February 28, 2014) and the 2013 Acquisitions (as defined in footnote 2 “Acquisition and Disposition Adjustments” of the section titled “Unaudited Pro Forma Combined Consolidated Financial Statements—Notes to Pro Forma Combined Consolidated Financial Statements” below) as if such acquisitions had been completed on January 1, 2013; and

 

    exclude the operating results of three hotels, one sold on May 30, 2014, one sold on August 28, 2014 and one sold on December 31, 2014.

The pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the pro forma combined consolidated financial statements provide a detailed discussion of how such adjustments were derived and presented in the pro forma combined consolidated financial and operating data. See “Unaudited Pro Forma Combined Consolidated Financial Statements—Notes to Pro Forma Combined Consolidated Financial Statements.” The pro forma combined consolidated financial information should be read in conjunction with “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization,” “Capitalization,” “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions,” “Description of Indebtedness” and our combined consolidated financial statements and related notes thereto and the financial statements of the Aston Waikiki Beach Hotel and related notes thereto included elsewhere in this information statement.

The pro forma combined consolidated financial and operating data has been prepared for illustrative purposes only and is not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such pro forma combined consolidated financial and operating data necessarily indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Forward-Looking Statements.”

The information below should be read in connection with “Capitalization”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties” and the combined consolidated financial statements and related notes included elsewhere in this information statement.

 

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    Xenia Portfolio     Prior Combined Portfolio  
    Pro Forma Combined
Consolidated
    Condensed
Combined Consolidated
    Combined Consolidated  
    For the
nine months
ended
September 30,
2014
    For the
twelve months
ended
December 31,
2013
    For the
nine months
ended
September 30,
2014
    For the
nine months
ended
September 30,
2013
    For the
year ended
December 31,
2013
    For the
year ended
December 31,
2012
    For the
year ended
December 31,
2011
 

Selected Statement of Operations Data:

             

Revenues:

             

Room revenues

  $ 476,893      $ 587,743      $ 481,001      $ 310,806      $ 443,267      $ 323,959      $ 224,561   

Food and beverage revenues

    169,588        219,045        171,379        108,692        168,368        116,260        65,002   

Other revenues

    44,630        54,287        44,375        27,316        40,236        26,661        15,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 691,111      $ 861,075      $ 696,755      $ 446,814      $ 651,871      $ 466,880      $ 305,248   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Room expenses

    104,899        133,671        105,777        66,250        96,444        70,165        48,218   

Food and beverage expenses

    115,536        151,591        117,250        75,008        114,011        78,080        45,421   

Other direct expenses

    24,848        31,626        24,843        16,742        24,542        17,401        9,138   

Other indirect expenses

    159,383        203,135        162,698        108,553        157,385        117,355        75,545   

Management fees

    39,276        43,694        39,788        26,275        37,683        26,827        18,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel operating expenses

    443,942        563,717        450,356        292,828        430,065        309,828        196,985   

Depreciation and amortization

    106,875        139,747        106,231        71,696        104,229        89,629        68,600   

Real estate taxes, personal property taxes and insurance

    30,098        35,496        30,595        19,100        27,548        22,382        14,403   

General and administrative expenses

    26,743        17,060        24,268        9,059        14,151        9,008        6,997   

Business management fees

    1,474        12,743        1,474        9,334        12,743        10,812        9,996   

Acquisition transaction costs

    —          —          1,148        1,116        2,275        751        649   

Provision for asset impairments

    —          21,041        4,665        26,175        49,145        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

  $ 609,132      $ 789,804      $ 618,737      $ 429,308      $ 640,156      $ 442,410      $ 297,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 81,979      $ 71,271      $ 78,018      $ 17,506      $ 11,715      $ 24,470      $ 7,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

             

Gain (loss) on sale of investment properties

    —          —          865        —          —          (589     —     

Other income (loss)

    71        (2,140     (999     335        (1,113     798        988   

Interest expense

    (38,762     (51,899     (43,534     (39,005     (52,792     (45,061     (28,885

Equity in earnings (loss) and gain (loss) and (impairment) of investment in unconsolidated entities, net

    —          —          4,216        (184     (33     (3,719     60   

Income tax (expense) benefit

    (5,786     (3,043     (5,786     (6,139     (3,043     (5,718     3,207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 37,502      $ 14,189      $ 32,780      $ (27,487   $ (45,266   $ (29,819   $ (17,012
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from discontinued operations

    —          —          1,812        (1,746     (6,202     (10,638     (97,293

Less: Net income attributable to noncontrolling interests

    —          —          —          —          —          (5,689     (288
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Company

  $ 37,502      $ 14,189      $ 34,592      $ (29,233   $ (51,468   $ (46,146   $ (114,593
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

             

Pro forma basic earnings per share

  $ 0.33      $ 0.12        N/A        N/A        N/A        N/A        N/A   

Pro forma diluted earnings per share

    0.33        0.12        N/A        N/A        N/A        N/A        N/A   

Pro forma weighted average shares outstanding – basic

    113,529,973        113,397,997        N/A        N/A        N/A        N/A        N/A   

Pro forma weighted average shares outstanding – diluted

    114,034,050        113,793,924        N/A        N/A        N/A        N/A        N/A   

 

     Xenia Portfolio     Prior Combined Portfolio  
     Pro
Forma Combined
Consolidated
    Condensed
Combined
Consolidated
     Combined Consolidated  
     As of
September 30, 2014
    As of
September 30, 2014
     As of
December 31, 2013
     As of
December 31, 2012
     As of
December 31, 2011
 

Selected Balance Sheet Data:

             

Cash and cash equivalents

   $ 266,977 (1)    $ 126,525       $ 89,169       $ 65,004       $ 44,014   

Restricted cash

     104,996        105,296         87,804         65,847         52,777   

Total assets

     3,074,896        3,878,351         3,756,658         2,878,708         2,552,560   

Total debt

     1,166,780        1,337,590         1,280,220         1,011,421         1,242,017   

Total equity

     1,804,352        1,883,627         1,818,255         1,217,977         1,247,674   

 

(1) Upon our separation from Inland American, in addition to the Capital Contribution and the additional capital contribution of $16.0 million, we expect to have a minimum of approximately $50 million of cash on hand, before the payment of fees and expenses related to the separation and certain other costs as described in “Certain Relationships and Related Transactions—Agreements with Inland American—Separation and Distribution Agreement.” Cash in excess of this amount may be distributed to Inland American in Inland American’s sole discretion, pursuant to the Separation and Distribution Agreement.

 

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UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma combined consolidated balance sheet as of September 30, 2014 and unaudited pro forma combined consolidated statements of operations for the nine months ended September 30, 2014 and the year ended December 31, 2013 have been prepared to reflect the following transactions as if they had occurred on September 30, 2014 for the unaudited pro forma combined consolidated balance sheet and January 1, 2013 for the unaudited pro forma combined consolidated statement of operations:

 

    the consummation of the Reorganization Transactions, after which we will own solely the Xenia Portfolio;

 

    the exclusion of the Suburban Select Service Portfolio to the extent it is reflected as held for sale on the Company’s balance sheet as of September 30, 2014;

 

    the Capital Contribution;

 

    the issuance of 125 shares of Series A Preferred Stock;

 

    the repayment of approximately $84.0 million of borrowings outstanding under existing mortgage indebtedness, funded by Inland American;

 

    reflect an additional capital contribution of $16.0 million, all of which the Company intends to use to paydown existing mortgage indebtedness in 2015;

 

    reflect a non-cash capital contribution of $86.8 million to settle the Company’s allocated share of Inland American’s unsecured credit facility;

 

    reflect the Company’s entry into the intended new $400 million unsecured revolving credit facility;

 

    the issuance of 113,396,997 shares of our common stock to Inland American pursuant to a stock dividend prior to the distribution; and

 

    the distribution of 107,728,098 shares of our common stock to holders of Inland American common stock based upon the number of Inland American shares outstanding on             , 2015 and 5,669,899 shares retained by Inland American.

In addition, the pro forma combined consolidated statements of operations:

 

    reflect the consummation of the acquisition of the Aston Waikiki Beach Hotel (which the Company acquired on February 28, 2014) and the 2013 Acquisitions (as defined in footnote 2 below) as if such acquisitions had been completed on January 1, 2013; and

 

    exclude the operating results of three hotels, one sold on May 30, 2014, one sold on August 28, 2014 and one sold on December 31, 2014.

The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. The notes to the unaudited pro forma combined financial statements provide a detailed discussion of how such adjustments were derived and presented in the unaudited pro forma combined financial and operating data. The unaudited pro forma combined financial information should be read in conjunction with “Summary—Our Structure and Reorganization Transactions—Our Corporate Reorganization,” “Capitalization,” “Selected Historical Combined Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Certain Relationships and Related Transactions,” “Description of Indebtedness” and our combined financial statements and related notes thereto and the financial statements of the Aston Waikiki Beach Hotel and related notes thereto included elsewhere in this information statement.

The unaudited pro forma combined consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of our financial position or results of operations had the transactions described above for which we are giving pro forma effect actually occurred on the dates or for the periods indicated, nor is such unaudited pro forma financial information necessarily indicative of the results to be expected for any future period. A number of factors may affect our results. See “Risk Factors” and “Forward-Looking Statements.”

 

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Unaudited Pro Forma Combined Consolidated Balance Sheet

As of September 30, 2014

(in thousands)

 

    Historical     Acquisition /
Disposition
Adjustments(1)
    Capital
Contribution and
Financing
Transactions(2)
    Other
Adjustments(4)
    Pro Forma  

Assets

       

Investment in hotel properties, net

  $ 2,578,599      $ (6,028   $ —        $ —        $ 2,572,571   

Cash and cash equivalents

    126,525        (537     140,989        —          266,977   

Accounts receivable, net

    31,429        (233     —          —          31,196   

Prepaid expenses and other assets

    204,404        (742     490        —          204,152   

Assets held for sale

    937,394        (937,394     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,878,351      $ (944,934   $ 141,479      $ —        $ 3,074,896   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

       

Debt

  $ 1,337,590      $ —        $ (170,810   $ —        $ 1,166,780   

Accounts payable and accrued expenses

    75,649        (640     —          —          75,009   

Other liabilities

    29,109        (354     —          —          28,755   

Liabilities associated with assets held for sale

    552,376        (552,376     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 1,994,724      $ (553,370   $ (170,810   $ —        $ 1,270,544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholder’s equity:

       

Capital contributions

  $ 2,219,866      $ (541,599   $ 312,648      $ —        $ 1,990,915   

Additional paid-in capital

    —          —          —          —          —     

Accumulated distributions in excess of net loss

    (339,368     150,035        (359     —          (189,692
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

  $ 1,880,498      $ (391,564   $ 312,289      $ —        $ 1,801,223   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interests

  $ 3,129      $ —        $ —        $ —        $ 3,129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

  $ 1,883,627      $ (391,564   $ 312,289      $ —        $ 1,804,352   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 3,878,351      $ (944,934   $ 141,479      $ —        $ 3,074,896   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited pro forma combined consolidated financial statements.

 

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Unaudited Pro Forma Combined Consolidated Statement of Operations

For the nine months ended September 30, 2014

(in thousands)

 

    Historical     Acquisition /
Disposition
Adjustments(1)
    Capital
Contribution and
Financing
Transactions(2)
    Other
Adjustments(4)
    Pro Forma  

Revenues

       

Room revenues

  $ 481,001      $ (4,108   $ —        $ —        $ 476,893   

Food and beverage revenues

    171,379        (1,791     —          —          169,588   

Other revenues

    44,375        255        —          —          44,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 696,755      $ (5,644   $ —        $ —        $ 691,111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

         

Hotel operating expenses

         

Room expenses

  $ 105,777      $ (878   $ —        $ —        $ 104,899   

Food and beverage expenses

    117,250        (1,714     —          —          115,536   

Other direct expenses

    24,843        5        —          —          24,848   

Other indirect expenses

    162,698        (3,315     —          —          159,383   

Management fees

    39,788        (512     —          —          39,276   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel operating expenses

    450,356        (6,414     —          —          443,942   

Depreciation and amortization

    106,231        644        —          —          106,875   

Real estate taxes, personal property taxes and insurance

    30,595        (497     —          —          30,098   

General and administrative expenses(3)

    24,268        —          —          2,475        26,743   

Business management fees(3)

    1,474        —          —          —          1,474   

Acquisition transaction costs

    1,148        —          —          (1,148     —     

Provision for asset impairments

    4,665        (4,665     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 618,737      $ (10,932   $ —        $ 1,327      $ 609,132   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 78,018      $ 5,288      $ —        $ (1,327   $ 81,979   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain (loss) on sale of investment properties

    865        (865     —          —          —     

Other income (loss)

    (999     1,070        —            71   

Interest expense

    (43,534     248        4,524        —          (38,762

Equity in earnings (loss) and gain (loss) and (impairment) of investment in unconsolidated entities, net

    4,216        (4,216     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  $ 38,566      $ 1,525      $ 4,524      $ (1,327   $ 43,288   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (expense) benefit

    (5,786     —          —          —          (5,786
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 32,780      $ 1,525      $ 4,524      $ (1,327   $ 37,502   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data :

         

Pro forma basic earnings per share

    N/A        N/A        N/A        N/A      $ 0.33   

Pro forma diluted earnings per share

    N/A        N/A        N/A        N/A        0.33   

Pro forma weighted average shares outstanding – basic

    N/A        N/A        N/A        N/A        113,529,973   

Pro forma weighted average shares outstanding – diluted

    N/A        N/A        N/A        N/A        114,034,050   

See notes to unaudited pro forma combined consolidated financial statements.

 

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Unaudited Pro Forma Combined Consolidated Statement of Operations

For the twelve months ended December 31, 2013

(in thousands)

 

    Historical     Acquisition /
Disposition
Adjustments(1)
    Capital
Contribution and
Financing
Transactions(2)
    Other
Adjustments(4)
    Pro Forma  

Revenues

       

Room revenues

  $ 443,267      $ 144,476      $ —        $ —        $ 587,743   

Food and beverage revenues

    168,368        50,677        —          —          219,045   

Other revenues

    40,236        14,051        —          —          54,287   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 651,871      $ 209,204      $ —        $ —        $ 861,075   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

         

Hotel operating expenses

         

Room expenses

  $ 96,444      $ 37,227      $ —        $ —        $ 133,671   

Food and beverage expenses

    114,011        37,580        —          —          151,591   

Other direct expenses

    24,542        7,084        —          —          31,626   

Other indirect expenses

    157,385        45,750        —          —          203,135   

Management fees

    37,683        6,011        —          —          43,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hotel operating expenses

    430,065        133,652        —          —          563,717   

Depreciation and amortization

    104,229        35,518        —          —          139,747   

Real estate taxes, personal property taxes and insurance

    27,548        7,948        —          —          35,496   

General and administrative expenses(3)

    14,151        —          —          2,909        17,060   

Business management fees(3)

    12,743        —          —          —          12,743   

Acquisition transaction costs

    2,275        —          —          (2,275     —     

Provision for asset impairments

    49,145        (28,104     —          —          21,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  $ 640,156      $ 149,014      $ —        $ 634      $ 789,804   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (l