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 nine months ended September 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 of previously recorded impairment loss 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 and nine months ended September 30, 2013, impairment of $0.2 million was recorded on one hotel reclassified as held for use in the fourth quarter of 2013. No trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels.

Held for sale

During the three months ended September 30, 2014, Level 3 inputs were used to determine non-cash impairment losses of $1.0 million on six hotels held for sale. Negligible recovery of previously recorded impairment loss was taken on two hotels at the time of sale. During the nine months ended September 30, 2014, Level 3 inputs were used to determine non-cash impairment losses of $2.0 million on six hotels held for sale. The Company recorded $0.4 million of recovery on previously recorded impairment on one hotel held for sale. Impairment of $0.3 million was taken on three properties sold, and recovery of previously recorded impairment of $0.4 million was taken on three properties sold.

During the three months ended September 30, 2013, impairment of $0.2 million was taken on a hotel held for sale. There was negligible impairment of one property sold and recovery of $0.1 million on four properties sold. During the nine months ended September 30, 2013, Level 3 inputs were used to determine non-cash impairment losses of $0.7 million on one property held for sale and $1.0 million on eight properties sold. Recovery of $0.2 million was taken on five properties sold.

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.