Liquidity

The following disclosure and analysis is pursuant to ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires the Company to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued. To satisfy the requirements of the new standard, the Company’s evaluation considered a 13 month period beginning September 30, 2015.

The Company performs a liquidity analysis to determine if expected hotel operating cash flow is sufficient to cover all of the Company’s obligations as they become due, in this case, beginning on September 30, 2015 and ending on October 31, 2016. Our initial analysis considered only available cash and operating cash inflows without consideration of cash inflows from transactions that are in process as of the date of this filing, but were not yet finalized, such as proceeds on asset dispositions or proceeds from financing transactions that are not yet closed.

The Company believes the cash and available revolver of $14.9 million and $5.9 million, respectively, at September 30, 2015, cash generated from the operations of hotels, future sales of hotel properties held for sale, and proceeds from the refinancing of debt that occurred in October 2015 will be sufficient to cover corporate overhead, recurring monthly debt service, anticipated capital improvements, cash required in October 2015 to fund contracted acquisitions, and remaining loans maturing in 2015 (there are no loans maturing in 2016).

Although, as noted above, the funds are expected to be available to satisfy the maturing debt, management plans to use the available cash after operational needs to provide the equity to transition to upper midscale, upscale and upper upscale hotels and to satisfy the loan obligations through refinancing and the use of a portion of the excess proceeds from asset sales. The Company has entered into agreements to purchase three hotels for $42.5 million which closed in early October 2015 and plans to pursue other acquisitions funded with excess proceeds from future hotel sales and other funding sources. We are attempting to dispose of assets that are not generating yields consistent with our investment objectives or reinvestment alternatives and we are targeting acquisitions that we believe will be accretive. The execution of the Company’s long term plan is dependent upon future hotel sales and the availability to refinance existing maturing debt which cannot be assured.

Maturing debt

At December 31, 2014 we had $42.1 million of debt with contractual maturities in 2015 (no debt matures in 2016). As of September 30, 2015, we had reduced that obligation to $14.1 million through refinancing, amortization and repayment using the proceeds from hotel sales. Since the end of the third quarter of 2015 through the date of our filing, the remaining 2015 obligation was further reduced to $1.3 million principally as a result of the following transactions:

An $11.5 million balance on a mortgage loan with Citigroup Global Markets Realty Corp. maturing November 11, 2015 was refinanced with a $10 million mortgage loan with The Huntington National Bank maturing October 26, 2020 with the remainder of the balance paid in cash; and

The sale of one hotel property was completed reducing the mortgage loan with GE Capital Franchise Finance LLC (“GE”) maturing December 15, 2015 by $1.1 million, bringing the remaining outstanding balance on this debt to $1.1 million. The company anticipates that the net proceeds on the sale of the GE encumbered assets classified as held for sale will be sufficient to repay the remainder of this maturing loan.

Over the past two years the lending market has experienced increased liquidity and a relaxing of underwriting standards and as such, we believe we will be able to refinance on similar or perhaps more favorable terms. However, notwithstanding our perception that the lending market has improved somewhat, we may not be successful in our efforts to refinance or repay our maturing debt. As of September 30, 2015 we are not in default under the terms of any of our loans. The Company believes that we will be compliant under the terms of all of our loans in 2015.

Disposition plan

Our ability to dispose of assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates. At September 30, 2015, we have 12 hotels held for sale, and in October and November to date we have sold five of these hotels generating an estimated $5.3 million of cash, leaving seven held for sale hotels, which, if sold, we believe will generate $6.3 million in net proceeds after debt repayment available for reinvestment. Over the last five years, as of September 30, 2015, we have sold 67 hotels. However, with respect to future hotel sales, we cannot predict:

whether we will be able to find buyers for identified assets at prices and / or other terms acceptable to us:

whether potential buyers will be able to secure financings: and

the length of time needed to find a buyer and to close the sale of a property.

Other Obligations

The Company has an obligation to RES to use $25 million of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions. In February 2012, the Company issued 3.0 million shares of Series C convertible preferred stock to Real Estate Strategies, L.P. which provided $28.6 million of net proceeds. On October 2, 2015, following the completion of the acquisitions (discussed in Subsequent Events below), the company believes it has satisfied all but $1.4 million of this obligation.

The Company did not declare a common stock dividend during the first three quarters of 2015 or the years 2014, 2013 or 2012. In December 2013, the Company announced the suspension of the regular dividends on its outstanding preferred stock to preserve capital and improve liquidity. The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy.

Possible sources of liquidity to fund the longer-term liquidity needs and pay the preferred dividends include additional secured or unsecured debt financings, and /or proceeds from public or private issuances of debt or equity securities.

Historically, the Company has had recurring losses from operations and had a substantial amount of debt maturing for which the Company did not have committed funding sources. Significant progress has been made bringing the obligation for 2015 debt maturities down from $42.1 million of contractual maturities at December 31, 2014 to $14.1 million as of September 30, 2015 to $1.3 million as of the date of this filing. In addition, the Company’s liquidity has improved significantly. The execution of the Company’s long term plan, as described above, is dependent upon future hotel sales and the ability to refinance existing maturing debt which cannot be assured. However, based on these improvements, there is no longer substantial doubt regarding the Company’s ability to continue as a going concern within one year after the date that the financial statements have been issued.