Impairment Losses

Held for use

In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall – Subsequent Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.

Each quarter we apply a second analysis on those properties identified in the 15% change analysis or which have had a trigger event. The analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. In performing this analysis, the Company makes the following assumptions:

Holding periods range from three to five years for non-core assets, and ten years for those assets considered as core.

Cash flow from trailing twelve months for the individual properties multiplied by the holding period as noted above. The Company does not assume growth rates on cash flows as part of its step one analysis.

A revenue multiplier for the terminal value based on an average of historical sales from leading industry brokers of like properties was applied according to the assigned holding period.

During the three and six months ended June 30, 2014, no trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels. The Company did record $0.1 million of recovery on one hotel that was moved from held for sale to held for use at the end of the first quarter of 2014.

During the three months ended March 31, 2013, no trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels. For the three months ending June 30, 2013, negligible impairment was recorded on one hotel reclassified as held for use in the fourth quarter of 2013.

Held for sale

During the three months ending June 30, 2014, Level 3 inputs were used to determine non-cash impairment losses of $1.4 million on six held for sale hotels. $0.4 million of recovery from previously recorded impairment loss was taken on three hotels at the time of sale. $0.5 million of recovery was recorded on two hotels held for sale. During the three months ending March 31, 2014, Level 3 inputs were used to determine non-cash impairment losses of approximately $91,000 on three hotels held for sale and two hotels at the time of sale.

During the three months ending June 30, 2013, Level 3 inputs were used to determine $0.5 million of impairment on one hotel held for sale. $0.6 million of impairment was taken on five hotels subsequently sold. $0.1 million of recovery was recorded on three hotels subsequently sold. During the three months ending March 31, 2013, Level 3 inputs were used to determine non-cash impairment loss of $0.5 million on eleven subsequently sold hotels and one held for sale hotel. The Company also recorded negligible recovery of impairment on one hotel at the time of sale.

The fair value of an asset held for sale is based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales. We record impairment charges and write down the carrying value of an asset if the carrying value exceeds the estimated selling price less costs to sell.