AHT 2013 10Q - Q3

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission file number: 001-31775

ASHFORD HOSPITALITY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland
 
86-1062192
(State or other jurisdiction of incorporation or organization)
 
(IRS employer identification number)
 
 
 
14185 Dallas Parkway, Suite 1100
 
 
Dallas, Texas
 
75254
(Address of principal executive offices)
 
(Zip code)

(972) 490-9600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act):
Large accelerated filer
þ
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value per share
 
80,565,563
(Class)
 
Outstanding at November 6, 2013



ASHFORD HOSPITALITY TRUST, INC
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2013

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
 
PART II. OTHER INFORMATION
 


Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
September 30,
2013
 
December 31,
2012
Assets
(Unaudited)
Cash and cash equivalents
$
310,427

 
$
185,935

Marketable securities
25,029

 
23,620

     Total cash, cash equivalents and marketable securities
335,456

 
209,555

Investment in hotel properties, net
2,929,773

 
2,872,304

Restricted cash
84,215

 
84,786

Accounts receivable, net of allowance of $396 and $265, respectively
30,520

 
35,116

Inventories
2,243

 
2,111

Notes receivable, net of allowance of $8,037 and $8,333, respectively
11,443

 
11,331

Investment in unconsolidated joint ventures
144,068

 
158,694

Deferred costs, net
14,010

 
17,194

Prepaid expenses
13,832

 
10,145

Derivative assets, net
256

 
6,391

Other assets
6,252

 
4,594

Intangible asset, net
2,654

 
2,721

Due from affiliates
1,416

 
1,168

Due from third-party hotel managers
53,218

 
48,619

Total assets
$
3,629,356

 
$
3,464,729

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Indebtedness
$
2,440,413

 
$
2,339,410

Capital leases payable
37

 
—

Accounts payable and accrued expenses
98,697

 
84,293

Dividends payable
20,734

 
18,258

Unfavorable management contract liabilities
8,313

 
11,165

Due to related party, net
1,157

 
3,725

Due to third-party hotel managers
1,846

 
1,410

Liabilities associated with marketable securities and other
1,422

 
1,641

Other liabilities
6,040

 
6,348

Total liabilities
2,578,659

 
2,466,250

 
 
 
 
Redeemable noncontrolling interests in operating partnership
196,427

 
151,179

 
 
 
 
Equity:
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized:
 
 
 
Series A Cumulative Preferred Stock, 1,657,206 shares issued and outstanding at September 30, 2013 and December 31, 2012
17

 
17

Series D Cumulative Preferred Stock, 9,468,706 shares issued and outstanding at September 30, 2013 and December 31, 2012
95

 
95

Series E Cumulative Preferred Stock, 4,630,000 shares issued and outstanding at September 30, 2013 and December 31, 2012
46

 
46

Common stock, $0.01 par value, 200,000,000 shares authorized, 124,896,765 shares issued, 80,565,563 and 68,150,617 shares outstanding at September 30, 2013 and December 31, 2012, respectively
1,249

 
1,249

Additional paid-in capital
1,882,100

 
1,766,168

Accumulated other comprehensive loss
(240
)
 
(282
)
Accumulated deficit
(889,035
)
 
(770,467
)
Treasury stock, at cost (44,331,202 shares and 56,746,148 shares at September 30, 2013 and December 31, 2012, respectively)
(140,054
)
 
(164,884
)
Total shareholders’ equity of the Company
854,178

 
831,942

Noncontrolling interests in consolidated entities
92

 
15,358

Total equity
854,270

 
847,300

Total liabilities and equity
$
3,629,356

 
$
3,464,729


1

See Notes to Consolidated Financial Statements.

Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
REVENUE
(Unaudited)
 
(Unaudited)
Rooms
$
197,067

 
$
181,511

 
$
586,276

 
$
540,799

Food and beverage
34,444

 
33,732

 
117,328

 
115,382

Other
10,364

 
8,852

 
28,509

 
25,595

Total hotel revenue
241,875

 
224,095

 
732,113

 
681,776

Other
149

 
100

 
392

 
252

Total Revenue
242,024

 
224,195

 
732,505

 
682,028

EXPENSES
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Rooms
45,079

 
41,673

 
132,310

 
122,076

Food and beverage
25,860

 
24,486

 
80,651

 
78,436

Other expenses
74,275

 
67,723

 
215,923

 
203,988

Management fees
9,888

 
9,261

 
30,467

 
28,142

Total hotel operating expenses
155,102

 
143,143

 
459,351

 
432,642

Property taxes, insurance, and other
12,474

 
11,487

 
36,385

 
33,337

Depreciation and amortization
32,777

 
33,558

 
98,099

 
100,691

Impairment charges
(101
)
 
(5,066
)
 
(296
)
 
(5,253
)
Transaction costs
126

 
—

 
1,296

 
—

Corporate, general, and administrative
13,465

 
10,851

 
42,680

 
33,027

Total Operating Expenses
213,843

 
193,973

 
637,515

 
594,444

OPERATING INCOME
28,181

 
30,222

 
94,990

 
87,584

Equity in loss of unconsolidated joint ventures
(10,105
)
 
(7,373
)
 
(14,626
)
 
(17,654
)
Interest income
12

 
30

 
61

 
84

Other income
314

 
8,671

 
6,446

 
22,988

Interest expense and amortization of loan costs
(36,625
)
 
(37,129
)
 
(108,031
)
 
(108,289
)
Write-off of loan costs and exit fees
—

 
—

 
(1,971
)
 
—

Unrealized gain (loss) on marketable securities
257

 
(48
)
 
2,039

 
3,365

Unrealized loss on derivatives
(817
)
 
(9,353
)
 
(7,177
)
 
(26,753
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(18,783
)
 
(14,980
)
 
(28,269
)
 
(38,675
)
Income tax expense
(619
)
 
(639
)
 
(1,688
)
 
(2,884
)
LOSS FROM CONTINUING OPERATIONS
(19,402
)
 
(15,619
)
 
(29,957
)
 
(41,559
)
Income (loss) from discontinued operations
—

 
(2,412
)
 
—

 
(6,966
)
NET LOSS
(19,402
)
 
(18,031
)
 
(29,957
)
 
(48,525
)
Loss from consolidated entities attributable to noncontrolling interests
175

 
219

 
890

 
444

Net loss attributable to redeemable noncontrolling interests in operating partnership
2,892

 
2,665

 
5,152

 
6,902

NET LOSS ATTRIBUTABLE TO THE COMPANY
(16,335
)
 
(15,147
)
 
(23,915
)
 
(41,179
)
Preferred dividends
(8,490
)
 
(8,490
)
 
(25,471
)
 
(25,312
)
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(24,825
)
 
$
(23,637
)
 
$
(49,386
)
 
$
(66,491
)
 
 
 
 
 
 
 
 
INCOME (LOSS) PER SHARE - BASIC AND DILUTED:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Loss from continuing operations attributable to common shareholders
$
(0.31
)
 
$
(0.32
)
 
$
(0.69
)
 
$
(0.90
)
Income (loss) from discontinued operations attributable to common shareholders
—

 
(0.03
)
 
—

 
(0.09
)
Loss attributable to common shareholders
$
(0.31
)
 
$
(0.35
)
 
$
(0.69
)
 
$
(0.99
)
Weighted average common shares outstanding – basic
79,898

 
67,659

 
72,068

 
67,484

Diluted:
 
 
 
 
 
 
 
Loss from continuing operations attributable to common shareholders
$
(0.31
)
 
$
(0.32
)
 
$
(0.69
)
 
$
(0.90
)
Income (loss) from discontinued operations attributable to common shareholders
—

 
(0.03
)
 
—

 
(0.09
)
Loss attributable to common shareholders
$
(0.31
)
 
$
(0.35
)
 
$
(0.69
)
 
$
(0.99
)
Weighted average common shares outstanding – diluted
79,898

 
67,659

 
72,068

 
67,484

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.12

 
$
0.11

 
$
0.36

 
$
0.33

 
 
 
 
 
 
 
 
Amounts attributable to common shareholders:
 
 
 
 
 
 
 
Loss from continuing operations
$
(16,335
)
 
$
(13,038
)
 
$
(23,915
)
 
$
(35,082
)
Income (loss) from discontinued operations
—

 
(2,109
)
 
—

 
(6,097
)
Preferred dividends
(8,490
)
 
(8,490
)
 
(25,471
)
 
(25,312
)
Net loss attributable to common shareholders
$
(24,825
)
 
$
(23,637
)
 
$
(49,386
)
 
$
(66,491
)

See Notes to Consolidated Financial Statements.

3
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
 
(Unaudited)
Net loss
$
(19,402
)
 
$
(18,031
)
 
$
(29,957
)
 
$
(48,525
)
Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
Change in unrealized loss on derivatives
(2
)
 
(28
)
 
(4
)
 
(138
)
Reclassification to interest expense
29

 
2

 
53

 
26

Total other comprehensive income (loss)
27

 
(26
)
 
49

 
(112
)
Comprehensive loss
(19,375
)
 
(18,057
)
 
(29,908
)
 
(48,637
)
Less: Comprehensive loss attributable to noncontrolling interests in consolidated entities
175

 
219

 
890

 
444

Less: Comprehensive loss attributable to redeemable noncontrolling interests in operating partnership
2,888

 
2,666

 
5,145

 
6,915

Comprehensive loss attributable to the Company
$
(16,312
)
 
$
(15,172
)
 
$
(23,873
)
 
$
(41,278
)

See Notes to Consolidated Financial Statements.

4
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(Unaudited)
(in thousands)
 
Preferred Stock
 
 
 
Additional
Paid In
Capital
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
Noncontrolling
Interests In
Consolidated
Entities
 
 
 

Noncontrolling
Interests in
Operating
Partnership
 
Series A
 
Series D
 
Series E
 
Common Stock
 
 
Accumulated
Deficit
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amounts
 
Shares
 
Amounts
 
Shares
 
Amounts
 
Shares
 
Amounts
 
 
 
 
Shares
 
Amounts
 
 
Total
 
Balance at January 1, 2013
1,657

 
$
17

 
9,469

 
$
95

 
4,630

 
$
46

 
124,897

 
$
1,249

 
$
1,766,168

 
$
(770,467
)
 
$
(282
)
 
(56,746
)
 
$
(164,884
)
 
$
15,358

 
$
847,300

 
$
151,179

Equity-based compensation
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1,714

 
—

 
—

 
—

 
—

 
—

 
1,714

 
15,335

Forfeitures of restricted common shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5

 
—

 
—

 
(1
)
 
(5
)
 
—

 
—

 
—

Issuance of restricted shares/units
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(540
)
 
—

 
—

 
198

 
540

 
—

 
—

 
69

Issuances of preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
244

 
—

 
—

 
—

 
—

 
—

 
244

 
—

Purchases of Treasury Shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(33
)
 
(401
)
 
—

 
(401
)
 
—

Reissuances of Treasury Shares
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
115,415

 
—

 
—

 
12,251

 
24,696

 
—

 
140,111

 
—

Dividends declared- common stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(27,386
)
 
—

 
—

 
—

 
—

 
(27,386
)
 
—

Dividends declared- Preferred Stock- Series A
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,657
)
 
—

 
—

 
—

 
—

 
(2,657
)
 
—

Dividends declared- Preferred Stock- Series D
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(15,001
)
 
—

 
—

 
—

 
—

 
(15,001
)
 
—

Dividends declared – Preferred Stock- Series E
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,813
)
 
—

 
—

 
—

 
—

 
(7,813
)
 
—

Net unrealized loss on derivative instruments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
—

 
—

 
—

 
(4
)
 
—

Reclassification to interest expense
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
46

 
—

 
—

 
—

 
46

 
7

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(14,376
)
 
(14,376
)
 
(7,713
)
Redemption value adjustment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(41,796
)
 
—

 
—

 
—

 
—

 
(41,796
)
 
41,796

Unvested operating partnership units adjustment
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(906
)
 
—

 
—

 
—

 
—

 
—

 
(906
)
 
906

Net loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(23,915
)
 
—

 
—

 
—

 
(890
)
 
(24,805
)
 
(5,152
)
Balance at September 30, 2013
1,657

 
$
17

 
9,469

 
$
95

 
4,630

 
$
46

 
124,897

 
$
1,249

 
$
1,882,100

 
$
(889,035
)
 
$
(240
)
 
(44,331
)
 
$
(140,054
)
 
$
92

 
$
854,270

 
$
196,427


See Notes to Consolidated Financial Statements.

5
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash Flows from Operating Activities
(Unaudited)
Net loss
$
(29,957
)
 
$
(48,525
)
Adjustments to reconcile net loss to net cash flow provided by operating activities:
 
 
 
Depreciation and amortization
98,099

 
102,739

Impairment charges
(296
)
 
(1,133
)
Amortization of loan costs, write-off of loan costs, and exit fees
7,702

 
4,289

Equity in loss of unconsolidated joint ventures
14,626

 
17,654

Income from financing derivatives
(6,215
)
 
(23,988
)
Gain on disposition of hotel properties
(76
)
 
—

Realized and unrealized gains on marketable securities
(1,899
)
 
(2,273
)
Purchases of marketable securities
(15,525
)
 
(43,418
)
Sales of marketable securities
15,287

 
43,184

Net settlement of trading derivatives
(861
)
 
(2,718
)
Unrealized loss on derivatives
7,177

 
26,753

Equity-based compensation
17,049

 
13,701

Changes in operating assets and liabilities, exclusive of effect of hotel acquisition:
 
 
 
Restricted cash
571

 
7,191

Accounts receivable and inventories
3,002

 
(7,392
)
Prepaid expenses and other assets
(4,685
)
 
(892
)
Accounts payable and accrued expenses
14,837

 
23,940

Due from affiliates
(248
)
 
27

Due to related parties
(2,568
)
 
(113
)
Due to/from third-party hotel managers
(4,163
)
 
(1,059
)
Other liabilities
(3,109
)
 
(1,156
)
Net cash provided by operating activities
108,748

 
106,811

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Proceeds from payments of notes receivable
184

 
5,154

Net proceeds from sales of hotel properties
307

 
—

Acquisition of hotel property, net of cash acquired
(88,204
)
 
—

Improvements and additions to hotel properties
(68,958
)
 
(62,587
)
Net cash used in investing activities
(156,671
)
 
(57,433
)
 
 
 
 
Cash Flows from Financing Activities
 
 
 
Borrowings on indebtedness
268,875

 
135,000

Repayments of indebtedness and capital leases
(167,884
)
 
(188,914
)
Payments of loan costs and prepayment penalties
(4,709
)
 
(3,665
)
Payments of dividends
(58,094
)
 
(53,305
)
Purchases of treasury shares
(401
)
 
—

Payments for derivatives
(185
)
 
(137
)
Cash income from derivatives
7,878

 
24,081

Issuance of preferred stock
244

 
15,982

Issuances of treasury stock
140,111

 
—

Contributions from noncontrolling interests in consolidated entities
—

 
300

Distributions to noncontrolling interests in consolidated entities
(13,489
)
 
—

Other
69

 
64

Net cash provided by (used in) financing activities
172,415

 
(70,594
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
124,492

 
(21,216
)
Cash and cash equivalents at beginning of period
185,935

 
167,609

Cash and cash equivalents at end of period
$
310,427


$
146,393

Supplemental Cash Flow Information
 
 
 
Interest paid
$
100,217

 
$
102,445

Income taxes paid
$
1,155

 
$
166

Supplemental Disclosure of Non-Cash Investing and Financing Activity
 
 
 
Accrued interest added to principal of indebtedness
$
—

 
$
3,664

Net other liabilities acquired (net of other assets acquired and cash received)
$
1,691

 
$
—


See Notes to Consolidated Financial Statements.

6
Table of Contents

ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Organization and Description of Business

Ashford Hospitality Trust, Inc., together with its subsidiaries (“Ashford”), is a self-advised real estate investment trust (“REIT”) focused on investing in the hospitality industry across all segments and in all methods including direct real estate, securities, equity, and debt. We own our lodging investments and conduct our business through Ashford Hospitality Limited Partnership ("AHLP"), our operating partnership. Ashford OP General Partner LLC, a wholly-owned subsidiary of Ashford Hospitality Trust, Inc., serves as the sole general partner of our operating partnership. In this report, terms such as the "Company,” “we,” “us,” or “our” refer to Ashford Hospitality Trust, Inc. and all entities included in its consolidated financial statements.

As of September 30, 2013, we owned interests in the following hotel properties (all located in the United States) and notes receivable:
•
95 consolidated hotel properties ("legacy hotel properties"), including 91 directly owned and four owned through majority-owned investments in consolidated entities, which represent 20,176 total rooms (or 19,915 net rooms excluding those attributable to our partners),
•
28 hotel properties owned through a 71.74% common equity interest and a 50.0% preferred equity interest in an unconsolidated joint venture (“PIM Highland JV”), which represent 8,084 total rooms (or 5,800 net rooms excluding those attributable to our joint venture partner),
•
92 hotel condominium units at WorldQuest Resort in Orlando, Florida, and
•
a mezzanine loan with a carrying value of $3.3 million and a note with the city of Philadelphia, Pennsylvania of $8.1 million.

For federal income tax purposes, we have elected to be treated as a REIT, which imposes limitations related to operating hotels. As of September 30, 2013, our 95 legacy hotel properties were leased or owned by our wholly owned subsidiaries that are treated as taxable REIT subsidiaries for federal income tax purposes (collectively, these subsidiaries are referred to as “Ashford TRS”). Ashford TRS then engages third-party or affiliated hotel management companies to operate the hotels under management contracts. Hotel operating results related to these properties are included in the consolidated statements of operations. As of September 30, 2013, the 28 hotel properties owned by our unconsolidated joint venture, PIM Highland JV, are leased to its wholly owned subsidiary that is treated as a taxable REIT subsidiary for federal income tax purposes.

As of September 30, 2013, Remington Lodging & Hospitality, LLC, together with its affiliates (“Remington Lodging”), which is beneficially wholly owned by Mr. Monty J. Bennett, our Chairman and Chief Executive Officer and Mr. Archie Bennett, Jr., our Chairman Emeritus, managed 54 of our 95 legacy hotel properties, 21 of the 28 PIM Highland JV hotel properties, and WorldQuest Resort. Third-party management companies managed the remaining hotel properties.

2.
Significant Accounting Policies

Basis of Presentation – The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These consolidated financial statements include the accounts of Ashford Hospitality Trust, Inc., its majority-owned subsidiaries, and its majority-owned entities in which it has a controlling interest. All significant intercompany accounts and transactions between consolidated entities have been eliminated in these consolidated financial statements. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our 2012 Annual Report to Shareholders on Form 10-K and Form 10-K/A filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013 and March 12, 2013, respectively.

The following items affect reporting comparability related to our consolidated financial statements:

•
Historical seasonality patterns at some of our properties cause fluctuations in our overall operating results. Consequently, operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

•
Marriott International, Inc. (“Marriott”) currently manages 32 of our legacy hotel properties. There were eight additional hotel properties managed by Marriott until May 31, 2013. For these 40 Marriott-managed hotels, the 2012 fiscal year reflects twelve weeks of operations in each of the first three quarters of the year and 16 weeks for the fourth quarter of the year. Beginning in 2013, the fiscal quarters end on March 31st, June 30th, September 30th and December 31st. Therefore, in any given quarterly period, period-over-period results will have different ending dates. For Marriott-managed hotels, the 2013 and 2012 fiscal years began on December 29, 2012 and December 31, 2011, respectively. The third quarters of 2013 and 2012 began on July 1, 2013 and June 16, 2012, respectively and ended on September 30, 2013 and September 7, 2012, respectively. As a result, the quarter ended September 30, 2013 contained 92 days while the quarter ended September 7, 2012 contained 84 days and the nine month periods ended September 30, 2013 and September 7, 2012 contained 276 days and 252 days, respectively. Prior results have not been adjusted.

Use of Estimates – The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Investments in Hotel Properties, net – Hotel properties are generally stated at cost. However, four hotel properties contributed upon Ashford's formation in 2003 are stated at the predecessor's historical cost, net of impairment charges, if any, plus a partial step-up related to the acquisition of noncontrolling interests from third parties associated with certain of these properties. For hotel properties owned through our majority-owned entities, the carrying basis attributable to the partners' minority ownership is recorded at the predecessor's historical cost, net of any impairment charges, while the carrying basis attributable to our majority ownership is recorded based on the allocated purchase price of our ownership interests in the entities. All improvements and additions which extend the useful life of hotel properties are capitalized.

Impairment of Investment in Hotel Properties – Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Recoverability of the hotel is measured by comparison of the carrying amount of the hotel to the estimated future undiscounted cash flows, which take into account current market conditions and our intent with respect to holding or disposing of the hotel. If our analysis indicates that the carrying value of the hotel is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the property's net book value exceeds its estimated fair value, or fair value, less cost to sell. In evaluating impairment of hotel properties, we make many assumptions and estimates, including projected cash flows, expected holding period, and expected useful life. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third-party appraisals, where considered necessary. No impairment charges were recorded for investment in hotel properties included in continuing operations for the three and nine months ended September 30, 2013 and 2012.

Notes Receivable – Mezzanine loan financing, classified as notes receivable, represents loans held for investment and intended to be held to maturity. Accordingly, these notes are recorded at cost, net of unamortized loan origination costs and fees, loan purchase discounts, and allowance for losses when a loan is deemed to be impaired. Premiums, discounts, and net origination fees are amortized or accreted as an adjustment to interest income using the effective interest method over the life of the loan. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received when contractually due. Payments received on impaired nonaccrual loans are recorded as adjustments to impairment charges. No interest income was recorded for the three and nine months ended September 30, 2013 and 2012.

Variable interest entities (“VIEs”), as defined by authoritative accounting guidance, must be consolidated by their controlling interest beneficiaries if the VIEs do not effectively disperse risks among the parties involved. Our remaining mezzanine note receivable at September 30, 2013 is secured by a hotel property and is subordinate to the controlling interest in the secured hotel property. Although the note receivable is considered to be a variable interest in the entity that owns the related hotel, we are not considered to be the primary beneficiary of the hotel property as a result of holding the loan. Therefore, we do not consolidate the hotel property for which we have provided financing. We will evaluate interests in entities acquired or created in the future to determine whether such entities should be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.

Impairment of Notes Receivable – We review notes receivable for impairment each reporting period. A loan is impaired when, based on current information and events, collection of all amounts recorded as assets on the balance sheet is no longer considered probable. We apply normal loan review and underwriting procedures (as may be implemented or modified from time to time) in making that judgment.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


When a loan is impaired, we measure impairment based on the present value of expected cash flows discounted at the loan’s effective interest rate against the value of the asset recorded on the balance sheet. We may also measure impairment based on a loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Loan impairments are recorded as a valuation allowance and a charge to earnings. Our assessment of impairment is based on considerable management judgment and assumptions. No impairment charges were recorded during the three and nine months ended September 30, 2013 and 2012. Valuation adjustments of $101,000 and $296,000 on previously impaired notes were credited to impairment charges during the three and nine months ended September 30, 2013, respectively. Valuation adjustments of $5.1 million and $5.3 million on previously impaired notes were credited to impairment charges during the three and nine months ended September 30, 2012, respectively.
  
Investments in Unconsolidated Joint Ventures – Investments in unconsolidated joint ventures, in which we have ownership interests ranging from 14.4% to 71.74%, are accounted for under the equity method of accounting by recording the initial investment and our percentage of interest in the joint ventures' net income (loss). We review investments in our unconsolidated joint ventures for impairment in each reporting period. An investment is impaired when its estimated fair value is less than the carrying amount of our investment. Any impairment is recorded in equity earnings (loss) in unconsolidated joint ventures. No such impairments were recorded in the three and nine months ended September 30, 2013 and 2012.

Our investments in unconsolidated joint ventures are considered to be variable interests in the underlying entities. VIEs, as defined by authoritative accounting guidance, must be consolidated by a reporting entity if the reporting entity is the primary beneficiary because it has (i) the power to direct the VIE’s activities that most significantly impact the VIE’s economic performance, (ii) an implicit financial responsibility to ensure that the VIE operates as designed, and (iii) an obligation to absorb losses of the VIE or the right to receive benefits from the VIE. Because we do not have the power and financial responsibility to direct our unconsolidated joint ventures’ activities and operations, we are not considered to be the primary beneficiary of these joint ventures. Although we have a 71.74% majority ownership in PIM Highland JV, all major decisions related to the joint venture, including establishment of policies and operating procedures with respect to business affairs and incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four persons with us and our joint venture partner each designating two of those persons. As a result, we utilize the equity accounting method with respect to PIM Highland JV, which had a carrying value of $144.1 million at September 30, 2013 based on our share of the joint venture’s equity. We will evaluate the interests in entities acquired or created in the future to determine whether such entities should be consolidated. In evaluating VIEs, our analysis involves considerable management judgment and assumptions.

Assets Held for Sale and Discontinued Operations – We classify assets as held for sale when management has obtained a firm commitment from a buyer and consummation of the sale is considered probable and expected within one year. In addition, we deconsolidate a property upon transfer of title. When deconsolidating a property/subsidiary, we recognize a gain or loss in net income measured as the difference between the fair value of any consideration received, the fair value of any retained noncontrolling investment in the former subsidiary at the date the subsidiary is deconsolidated, and the carrying amount of the former property/subsidiary. The related operations of assets held for sale are reported as discontinued if a) such operations and cash flows can be clearly distinguished, both operationally and financially, from our ongoing operations, b) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and c) we will not have any significant continuing involvement subsequent to the disposal.

During the three and nine months ended September 30, 2012, discontinued operations included two hotel properties disposed of in 2012. The Doubletree Guest Suites hotel in Columbus, Ohio was sold in November 2012 and the Hilton El Conquistador hotel in Tucson, Arizona was disposed of in December 2012. No impairment charges were recognized during the three months ended September 30, 2012. For the nine months ended September 30, 2012, we recognized an impairment charge of $4.1 million on the Hilton El Conquistador hotel. There were no assets held for sale as of September 30, 2013 and December 31, 2012.

Marketable Securities – Marketable securities, including U.S. treasury bills, public equity securities and equity put and call options of certain publicly traded companies, are recorded at fair value. Equity put and call options are considered derivatives. The fair value of these investments is based on the closing price as of the balance sheet date and is reported as “Marketable securities” or “Liabilities associated with marketable securities and other” in the consolidated balance sheets. On the consolidated statements of operations, net investment income, including interest income (expense), dividends, realized gains or losses and related costs incurred, is reported as a component of “Other income” while unrealized gains and losses on these investments are reported as “Unrealized gain (loss) on marketable securities."


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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Revenue Recognition – Hotel revenues, including room, food, beverage, and ancillary revenues such as Internet access, laundry, parking, and space rentals, are recognized when services have been rendered. Interest income is recognized when earned. We discontinue recording interest and amortizing discounts/premiums when the contractual payment of interest and/or principal is not received when contractually due. Sales taxes collected from customers and submitted to taxing authorities are not recorded in revenue.

Derivatives and Hedges – We use interest rate derivatives to hedge our risks and to capitalize on the historical correlation between changes in LIBOR (London Interbank Offered Rate) and RevPAR (Revenue per Available Room). Interest rate derivatives could include swaps, caps, floors and flooridors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. We also use credit default swaps to hedge financial and capital market risk. All of our derivatives are subject to master-netting settlement arrangements and the credit default swaps are subject to credit support annexes. For credit default swaps, cash collateral is posted by us as well as our counterparty. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral.

All derivatives are recorded at fair value in accordance with the applicable authoritative accounting guidance. Interest rate derivatives and credit default swaps are reported as “Derivative assets, net” or “Derivative liabilities” in the consolidated balance sheets. Accrued interest on non-hedge designated interest rate derivatives is included in “Accounts receivable, net” in the consolidated balance sheets. For interest rate derivatives designated as cash flow hedges:

a)
the effective portion of changes in fair value is initially reported as a component of “Accumulated Other Comprehensive Income (Loss)” (“OCI”) in the equity section of the consolidated balance sheets and reclassified to interest expense in the consolidated statements of operations in the period during which the hedged transaction affects earnings, and

b)
the ineffective portion of changes in fair value is recognized directly in earnings as “Unrealized loss on derivatives” in the consolidated statements of operations. For the three and nine months ended September 30, 2013 and 2012 there was no ineffectiveness.

For non-hedge designated interest rate derivatives and credit default swaps, changes in fair value are recognized in earnings as “Unrealized loss on derivatives” in the consolidated statements of operations.

Income Taxes - As a REIT, we generally will not be subject to federal corporate income tax on the portion of our net income (loss) that does not relate to taxable REIT subsidiaries. However, Ashford TRS is treated as a taxable REIT subsidiary for federal income tax purposes. In accordance with authoritative accounting guidance, we account for income taxes related to Ashford TRS using the asset and liability method under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, the analysis utilized by us in determining our deferred tax asset valuation allowance involves considerable management judgment and assumptions.

Recently Adopted Accounting Standards – In December 2011, the Financial Accounting Standards Board issued accounting guidance to require disclosures about offsetting assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master-netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements that are either netted on the balance sheet or subject to an enforceable master-netting agreement or similar arrangement. The new accounting guidance is effective for fiscal years, and interim periods within those years, beginning after January 1, 2013 and the disclosures should be reported retrospectively for all comparative periods presented. We adopted this accounting guidance on January 1, 2013. The adoption of this accounting guidance did not have any impact on our financial position or results of operations.
 
Reclassifications – Certain amounts in the consolidated financial statements for the three and nine months ended September 30, 2012 have been reclassified for discontinued operations. Additionally, certain amounts due from affiliates have been reclassified in the 2012 consolidated statement of cash flows. These reclassifications had no effect on our cash flows, equity, or net income (loss) previously reported.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

3.
Summary of Significant Transactions

Refinanced our $141.7 Million Mortgage Loan - On February 26, 2013, we refinanced our $141.7 million loan due August 2013, which had an outstanding balance of $141.0 million, with a $199.9 million loan due February 2018. The new loan provides for an interest rate of LIBOR + 3.50%, with no LIBOR floor. The new loan continues to be secured by the Capital Hilton in Washington, DC and the Hilton La Jolla Torrey Pines in La Jolla, CA. We have a 75% ownership interest in the properties, with Hilton holding the remaining 25%. The excess loan proceeds above closing costs and reserves were distributed to the partners on a pro rata basis. Our share of the excess loan proceeds was approximately $40.5 million, which was added to our unrestricted cash balance.

Acquisition of the Pier House Resort - On May 14, 2013, we acquired a 100% interest in the Pier House Resort in Key West, Florida, for a contractual purchase price of $90.0 million in cash and incurred transaction costs of approximately $872,000, which are included in transaction costs on the consolidated statement of operations. The purchase price has been allocated to the assets acquired and liabilities assumed on a preliminary basis using estimated fair value information currently available. We are in the process of evaluating the values assigned to investments in hotel properties, property level working capital balances and any potential intangibles. Thus, the balances recorded are subject to change and could result in adjustments. Any change to the amounts recorded within the investments in hotel properties will also impact the deprecation and amortization expense included on our consolidated statement of operations.

Planned Spin-off of an 8-hotel Portfolio - On June 17, 2013, we announced that our Board of Directors had approved a plan to spin-off an 80% ownership interest in an 8-hotel portfolio, totaling 3,146 rooms (2,912 net rooms excluding those attributable to our partners), to holders of our common stock in the form of a taxable special distribution. The distribution will be comprised of common stock in Ashford Hospitality Prime, Inc. (“Ashford Prime”), a newly formed company to which we plan to contribute the portfolio interests. This distribution will be made on November 19, 2013, on a pro rata basis to holders of our common stock as of November 8, 2013, with shareholders receiving one share of Ashford Prime common stock for every five shares of our common stock. A Form 10 registration statement has been filed with, and declared effective by, the SEC. Ashford Prime is expected to qualify as a real estate investment trust (“REIT”) for federal income tax purposes, and has filed an application to list its shares of common stock on the New York Stock Exchange, under the symbol “AHP.” The proposed transaction also includes options to purchase the Marriott Crystal Gateway in Arlington, Virginia and the Pier House Resort in Key West, Florida. Ashford Prime is expected to have an initial annual dividend policy of a minimum of $0.20 per share of Ashford Prime common stock, on an annual basis.

The net assets of the eight hotel properties in the spin-off are included in "assets held and used" until the spin-off is completed and the assets have been disposed of in accordance with the applicable accounting guidance. The operating results of the hotel properties in our consolidated statements of operations will be evaluated at the time the disposal is completed for inclusion in discontinued operations, in accordance with the applicable accounting guidance. The Marriott Crystal Gateway in Arlington, Virginia and the Pier House Resort in Key West, Florida are included in "assets held and used" and continuing operations as they do not meet the requirements to be classified as "held for sale" or "discontinued operations" in accordance with the applicable accounting guidance.

Common Stock Offering - On June 20, 2013, we commenced a follow-on public offering of 11.0 million shares of our common stock at $12.00 per share for gross proceeds of $132.0 million. The aggregate proceeds, net of the 4.25% underwriting discount and other expenses of $500,000, were approximately $125.9 million. The offering settled on June 26, 2013. We granted the underwriters a 30-day option to purchase up to an additional 1.65 million shares of our common stock. On July 24, 2013, the underwriters partially exercised their option and purchased an additional 1.25 million shares of our common stock at a price of $12.00 per share less the underwriting discount resulting in additional proceeds of approximately $14.2 million.

$69.0 Million Pier House Financing - On September 10, 2013, we completed the financing for a $69.0 million loan due September 2015 and secured by the Pier House Resort. The new financing has a two-year term and three, one-year extension options with no test requirements for the first two extensions. The loan provides for a floating interest rate of LIBOR + 4.90%, with no LIBOR Floor. The excess loan proceeds were added to our unrestricted cash balance.

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

4.
Investments in Hotel Properties, net

Investments in hotel properties, net consisted of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
Land
$
540,142

 
$
483,242

Buildings and improvements
2,812,427

 
2,779,589

Furniture, fixtures, and equipment
203,410

 
224,907

Construction in progress
11,546

 
10,499

Condominium properties
12,682

 
12,690

Total cost
3,580,207

 
3,510,927

Accumulated depreciation
(650,434
)
 
(638,623
)
Investments in hotel properties, net
$
2,929,773

 
$
2,872,304


Acquisition of the Pier House Resort - On May 14, 2013 we acquired a 100% interest in the Pier House Resort in Key West, Florida, for a contractual purchase price of $90.0 million in cash. In connection with the acquisition, we incurred transaction costs of $872,000, which are included in transaction costs on the consolidated statement of operations. The purchase price has been allocated to the assets acquired and liabilities assumed using the estimated fair value at the date of acquisition based on a third party appraisal.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in the acquisition (in thousands):
    
    
 
 
Land
$
56,900

Buildings and improvements
26,924

Furniture, fixtures, and equipment
6,100

 
89,924

Net other assets and liabilities
(1,690
)
Total
$
88,234

    
The results of operations of the hotel property have been included in our results of operations since May 14, 2013. For the three and nine months ended September 30, 2013, we have included revenues of $4.0 million and $6.4 million, respectively, and net income of $690,000 and $1.3 million, respectively, in the consolidated statements of operations.

The following table reflects the unaudited pro forma results of operations as if the acquisition had occurred on January 1, 2012, reflecting the addition of the Pier House operating results for the applicable periods from January 1, 2012 through May 13, 2013 and the removal of $126,000 and $872,000 of transaction costs for the three and nine months ended September 30, 2013, respectively, (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Total revenue
$
242,024

 
$
227,843

 
$
741,166

 
$
696,176

Loss from continuing operations
$
(19,276
)
 
$
(15,015
)
 
$
(25,409
)
 
$
(37,210
)
Net loss
$
(19,276
)
 
$
(17,427
)
 
$
(25,409
)
 
$
(44,176
)
 

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

5.
Notes Receivable

As of September 30, 2013 and December 31, 2012, we owned a note receivable of $8.1 million from the city of Philadelphia, Pennsylvania. The note bears interest at a rate of 12.85% and matures in 2018. The interest income recorded on the note receivable is offset against the interest expense recorded on the TIF loan of the same amount. See Note 8.

In addition, as of September 30, 2013 and December 31, 2012, we had one mezzanine loan receivable with a net carrying value of $3.3 million and $3.2 million, respectively, net of a valuation allowance of $8.0 million and $8.3 million, respectively. This note is secured by one hotel property, bears interest at a rate of 6.09%, and matures in 2017. All required payments on this loan are current. Ongoing payments are treated as reductions of carrying value with related valuation allowance adjustments recorded as credits to impairment charges.

6.
Investment in Unconsolidated Joint Ventures
    
Effective March 10, 2011, PIM Highland JV, a 28 hotel portfolio, became an investment in unconsolidated joint venture when we acquired a 71.74% common equity interest and a $25.0 million, or 50%, preferred equity interest earning an accrued but unpaid 15% annual return with priority over common equity distributions. Although we have majority ownership in PIM Highland JV, all major decisions related to the joint venture, including establishment of policies and operating procedures with respect to business affairs and incurring obligations and expenditures, are subject to the approval of an executive committee, which is comprised of four persons with us and our joint venture partner each designating two of those persons. As a result, we utilize the equity accounting method with respect to PIM Highland JV, which had a carrying value of $144.1 million and $158.7 million at September 30, 2013 and December 31, 2012, respectively.

Mortgage and mezzanine loans securing PIM Highland JV are non-recourse to the borrowers, except for customary exceptions or carve-outs that trigger recourse liability to the borrowers in certain limited instances. Recourse obligations typically include only the payment of costs and liabilities suffered by the lenders as a result of the occurrence of certain bad acts on the part of the borrower. However, in certain cases, the carve-outs could trigger recourse obligations on the part of the borrower with respect to repayment of all or a portion of the outstanding principal amount of the loans. We have entered into customary guaranty agreements pursuant to which we guaranty payment of any recourse liabilities of the borrowers that result from non-recourse carve-outs (which include, but are not limited to, fraud, misrepresentation, willful conduct resulting in waste, misappropriations of rents following an event of default, voluntary bankruptcy filings, unpermitted transfers of collateral, and certain environmental liabilities). In the opinion of management, none of these guaranty agreements, either individually or in the aggregate, are likely to have a material adverse effect on our business, results of operations, or financial condition. 

The following tables summarize the consolidated balance sheets as of September 30, 2013 and December 31, 2012 and the consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 of the PIM Highland JV (in thousands):

PIM Highland JV
Condensed Consolidated Balance Sheets
 
September 30,
2013
 
December 31,
2012
Total assets
$
1,398,407

 
$
1,417,204

 
 
 
 
Total liabilities
1,175,639

 
1,176,298

Members' equity
222,768

 
240,906

Total liabilities and members' equity
$
1,398,407

 
$
1,417,204

 
 
 
 
Our ownership interest in PIM Highland JV
$
144,068

 
$
158,694



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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

PIM Highland JV
 
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
 
 

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Total revenue
$
104,226

 
$
100,033

 
$
324,762

 
$
306,087

Total expenses
(100,422
)
 
(92,697
)
 
(292,487
)
 
(277,933
)
Operating income
3,804

 
7,336

 
32,275

 
28,154

Interest income and other
14

 
18

 
55

 
82

Interest expense, amortization and write-offs of deferred loan costs, discounts and premiums and exit fees
(16,238
)
 
(16,032
)
 
(48,089
)
 
(47,443
)
Other expenses
—

 
(6
)
 
—

 
(70
)
Income tax expense
(881
)
 
(914
)
 
(2,379
)
 
(3,378
)
Net loss
$
(13,301
)
 
$
(9,598
)
 
$
(18,138
)
 
$
(22,655
)
 
 
 
 
 
 
 
 
Our equity in loss of PIM Highland JV
$
(10,105
)
 
$
(7,373
)
 
$
(14,626
)
 
$
(17,654
)

Additionally, as of September 30, 2013 and December 31, 2012, we had a 14.4% subordinated beneficial interest in a trust that holds the Four Seasons hotel property in Nevis, which had a zero carrying value.

7.
Assets Held for Sale and Discontinued Operations
    
During the three and nine months ended September 30, 2012, discontinued operations included two hotel properties disposed of in 2012. The Doubletree Guest Suites hotel in Columbus, Ohio was sold in November 2012 and the Hilton El Conquistador hotel in Tucson, Arizona was disposed of in December 2012.

During the second quarter of 2012, we determined the hotel property in Tucson, Arizona was not to be held long-term as operating cash flows were not anticipated to cover principal and interest payments of the related debt secured by this hotel. In addition, regarding this loan, we ceased making principal and interest payments after July 31, 2012. Based on our assessment, which included marketing this hotel for sale, we concluded that the carrying value of this asset would not be recoverable. Consequently, in the second quarter of 2012, we recognized an impairment charge of $4.1 million related to this hotel, which reduced its carrying value to $19.7 million and represented our estimate of its fair value. The impairment charge was based on methodologies discussed in Note 2, which are considered Level 3 valuation techniques. There were no assets held for sale as of September 30, 2013 and December 31, 2012.

The following table summarizes the operating results of the discontinued hotel properties (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2012
 
 
 
 
Hotel revenues
$
5,974

 
$
23,161

Hotel operating expenses
(6,944
)
 
(21,695
)
Operating income (loss)
(970
)
 
1,466

Property taxes, insurance, and other
(389
)
 
(1,219
)
Depreciation and amortization
(642
)
 
(2,048
)
Impairment charges
—

 
(4,120
)
Interest expense and amortization of loan costs
(411
)
 
(1,045
)
Loss from discontinued operations before income tax expense
(2,412
)
 
(6,966
)
Income tax expense
—

 
—

Loss from discontinued operations
(2,412
)
 
(6,966
)
Loss from discontinued operations attributable to redeemable noncontrolling interest in operating partnership
303

 
869

Loss from discontinued operations attributable to the Company
$
(2,109
)
 
$
(6,097
)

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

8.
Indebtedness

Indebtedness consisted of the following (in thousands):
Indebtedness
Collateral
Maturity
Interest Rate
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
Mortgage loan (6)
2 hotels
August 2013
LIBOR (1) + 2.75%
 
$
—

 
$
141,667

Mortgage loan (3)
5 hotels
March 2014
LIBOR (1) + 4.50%
 
167,327

 
173,180

Mortgage loan (2)
9 hotels
May 2014
LIBOR (1) + 6.50%
 
135,000

 
135,000

Mortgage loan
1 hotel
May 2014
8.32%
 
5,147

 
5,285

Senior credit facility (5)
Various
September 2014
LIBOR (1) + 2.75% to 3.50%
 
—

 
—

Mortgage loan (2)
5 hotels
November 2014
Greater of 6.40% or LIBOR (1) + 6.15%
 
211,000

 
211,000

Mortgage loan
8 hotels
December 2014
5.75%
 
102,948

 
104,680

Mortgage loan
10 hotels
July 2015
5.22%
 
150,177

 
152,513

Mortgage loan (4)
1 hotel
September 2015
LIBOR (1) + 4.90%
 
69,000

 
—

Mortgage loan
8 hotels
December 2015
5.70%
 
95,415

 
96,907

Mortgage loan
5 hotels
February 2016
5.53%
 
108,557

 
110,169

Mortgage loan
5 hotels
February 2016
5.53%
 
90,027

 
91,364

Mortgage loan
5 hotels
February 2016
5.53%
 
77,983

 
79,140

Mortgage loan (7)
1 hotel
April 2017
5.91%
 
34,420

 
34,735

Mortgage loan
2 hotels
April 2017
5.95%
 
126,147

 
127,289

Mortgage loan
3 hotels
April 2017
5.95%
 
256,698

 
259,021

Mortgage loan
5 hotels
April 2017
5.95%
 
113,703

 
114,732

Mortgage loan
5 hotels
April 2017
5.95%
 
102,201

 
103,126

Mortgage loan
5 hotels
April 2017
5.95%
 
155,511

 
156,918

Mortgage loan
7 hotels
April 2017
5.95%
 
124,391

 
125,517

Mortgage loan (6)
2 hotels
February 2018
LIBOR (1) + 3.50%
 
198,666

 
—

TIF loan (7) (8)
1 hotel
June 2018
12.85%
 
8,098

 
8,098

Mortgage loan
1 hotel
November 2020
6.26%
 
101,604

 
102,562

Mortgage loan
1 hotel
April 2034
Greater of 6.00% or Prime + 1.00%
 
6,393

 
6,507

Total
 
 
 
 
$
2,440,413

 
$
2,339,410

____________________________________
(1) LIBOR rates were 0.179% and 0.209% at September 30, 2013 and December 31, 2012, respectively.
(2) These mortgage loans have three one-year extension options subject to satisfaction of certain conditions.
(3) This mortgage loan has a one-year extension option subject to satisfaction of certain conditions.
(4) This mortgage loan has three one-year extension options subject to satisfaction of certain conditions in the final year.
(5) Our borrowing capacity under our senior credit facility is $165.0 million. We have an option, subject to lender approval, to further expand the facility to an aggregate size of $225.0 million. We may use up to $10.0 million for standby letters of credit. The credit facility has a one-year extension option subject to advance notice and a 0.25% extension fee.
(6) On February 26, 2013, we refinanced our $141.7 million loan due August 2013 with a $199.9 million loan due February 2018. The new loan provides for an interest rate of LIBOR + 3.50%, with no LIBOR floor.
(7) These loans are collateralized by the same property.
(8) The interest expense from the TIF loan is offset against interest income recorded on the note receivable of the same amount. See Note 5.
 
On February 26, 2013, we refinanced our $141.7 million loan due August 2013, which had an outstanding balance of $141.0 million, with a $199.9 million loan due February 2018. The new loan provides for an interest rate of LIBOR + 3.50%, with no LIBOR floor. The new loan continues to be secured by the Capital Hilton in Washington, DC and the Hilton La Jolla Torrey Pines in La Jolla, CA. We have a 75% ownership interest in the properties, with Hilton holding the remaining 25%. The excess loan proceeds above closing costs and reserves were distributed to the partners on a pro rata basis. Our share of the excess loan proceeds was approximately $40.5 million, which was added to our unrestricted cash balance.

On September 10, 2013, we completed the financing for a $69.0 million loan due September 2015 and secured by the Pier House Resort. The new financing has a two-year term and three, one-year extension options with no test requirements for the first two extensions. The loan provides for a floating interest rate of LIBOR + 4.90%, with no LIBOR Floor. The excess loan proceeds were added to our unrestricted cash balance.

We are required to maintain certain financial ratios under various debt and derivative agreements. If we violate covenants in any debt or derivative agreement, we could be required to repay a portion of our indebtedness before maturity at a time when

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

we might be unable to arrange financing for such repayment on attractive terms, if at all. Violations of certain debt covenants may result in us being unable to borrow unused amounts under a line of credit, even if repayment of some or all borrowings is not required. The assets of certain of our subsidiaries are pledged under non-recourse indebtedness and are not available to satisfy the debts and other obligations of Ashford or AHLP, our operating partnership, and the liabilities of such subsidiaries do not constitute the obligations of Ashford or AHLP. Presently, our existing financial covenants are non-recourse and primarily relate to maintaining minimum debt coverage ratios, maintaining an overall minimum net worth, maintaining a maximum loan-to-value ratio, and maintaining an overall minimum total assets. As of September 30, 2013, we were in compliance in all material respects with all covenants or other requirements set forth in our debt and related agreements as amended.

We have derivative agreements that incorporate the loan covenant provisions of our senior credit facility requiring us to maintain certain minimum financial covenant ratios with respect to our indebtedness. Failure to comply with these covenant provisions would result in us being in default on any derivative instrument obligations covered by the applicable agreement. At September 30, 2013, we were in compliance with all the covenants under the senior credit facility and the fair value of derivatives that incorporate our senior credit facility covenant provisions was an asset of $211,000.

9.
Income (Loss) Per Share

Basic income (loss) per common share is calculated using the two-class method by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is calculated using the two-class method, or treasury stock method if more dilutive, and reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares, whereby such exercise or conversion would result in lower income per share. The following table reconciles the amounts used in calculating basic and diluted income (loss) per share (in thousands, except per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Loss from continuing operations allocated to common shareholders:
 
 
 
 
 
 
 
Loss from continuing operations attributable to the Company
$
(16,335
)
 
$
(13,038
)
 
$
(23,915
)
 
$
(35,082
)
Less: Dividends on preferred stocks
(8,490
)
 
(8,490
)
 
(25,471
)
 
(25,312
)
Less: Dividends on common stock
(9,617
)
 
(7,443
)
 
(27,223
)
 
(22,281
)
Less: Dividends on unvested restricted shares
(51
)
 
(55
)
 
(163
)
 
(215
)
Undistributed loss from continuing operations
(34,493
)
 
(29,026
)
 
(76,772
)
 
(82,890
)
Add back: Dividends on common stock
9,617

 
7,443

 
27,223

 
22,281

Distributed and undistributed loss from continuing operations - basic and diluted
$
(24,876
)
 
$
(21,583
)
 
$
(49,549
)
 
$
(60,609
)
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations allocated to common shareholders:
 
 
 
 
 
 
 
Income (loss) from discontinued operations - basic and diluted
$
—

 
$
(2,109
)
 
$
—

 
$
(6,097
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
79,898

 
67,659

 
72,068

 
67,484

 
 
 
 
 
 
 
 
Basic loss per share:
 
 
 
 
 
 
 
Loss from continuing operations allocated to common shareholders per share
$
(0.31
)
 
$
(0.32
)
 
$
(0.69
)
 
$
(0.90
)
Income (loss) from discontinued operations allocated to common shareholders per share
—

 
(0.03
)
 
—

 
(0.09
)
Net loss allocated to common shareholders per share
$
(0.31
)
 
$
(0.35
)
 
$
(0.69
)
 
$
(0.99
)
 
 
 
 
 
 
 
 
Diluted loss per share:
 
 
 
 
 
 
 
Loss from continuing operations allocated to common shareholders per share
$
(0.31
)
 
$
(0.32
)
 
$
(0.69
)
 
$
(0.90
)
Income (loss) from discontinued operations allocated to common shareholders per share
—

 
(0.03
)
 
—

 
(0.09
)
Net loss allocated to common shareholders per share
$
(0.31
)
 
$
(0.35
)
 
$
(0.69
)
 
$
(0.99
)

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ASHFORD HOSPITALITY TRUST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Due to the anti-dilutive effect, the computation of diluted loss per share does not reflect adjustments for the following items (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Loss from continuing operations allocated to common shareholders is not adjusted for:
 
 
 
 
 
 
 
Income allocated to unvested restricted shares
$
51

 
$
55

 
$
163

 
$
215

Loss attributable to noncontrolling interest in operating partnership units
(2,892
)
 
(2,362
)
 
(5,152
)
 
(6,033
)
Total
$
(2,841
)
 
$
(2,307
)
 
$
(4,989
)
 
$
(5,818
)
 
 
 
 
 
 
 
 
Weighted average diluted shares are not adjusted for:
 
 
 
 
 
 
 
Effect of unvested restricted shares
122

 
109

 
124

 
214

Effect of assumed conversion of operating partnership units
18,962

 
17,576

 
18,607

 
17,278

Total
19,084

 
17,685

 
18,731

 
17,492

10.
Derivative Instruments and Hedging

Interest Rate Derivatives – We are exposed to risks arising from our business operations, economic conditions, and financial markets. To manage these risks, we use interest rate derivatives to hedge our debt and potentially improve cash flows. We also use non-hedge derivatives to capitalize on the historical correlation between changes in LIBOR and RevPAR. Interest rate derivatives may include interest rate swaps, caps, floors and flooridors. Our derivatives are subject to master-netting settlement arrangements. The maturities on these instruments range from May 2014 to September 2015. To mitigate nonperformance risk, we routinely rely on a third party’s analysis of the creditworthiness of the counterparties, which supports our belief that the counterparties’ nonperformance risk is limited. All derivatives are recorded at fair value.

Credit Default Swap Derivatives – In August 2011, we entered into credit default swap transactions for a notional amount of $100.0 million to hedge financial and capital market risk for an upfront cost of $8.2 million that was subsequently returned to us as collateral by our counterparty. A credit default swap is a derivative contract that functions like an insurance policy against the credit risk of an entity or obligation.  The seller of protection assumes the credit risk of the reference obligation from the buyer (us) of protection in exchange for annual premium payments.  If a default or a loss, as defined in the credit default swap agreements, occurs on the underlying bonds, then the buyer of protection is protected against those losses.  The only liability for us, the buyer, is the annual premium and any change in value of the underlying CMBX index (if the trade is terminated prior to maturity).  For all CMBX trades completed to date, we were the buyer of protection.  Credit default swaps are subject to master-netting settlement arrangements and credit support annexes. Assuming the underlying bonds pay off at par over their remaining average life, our total exposure for these trades is approximately $8.5 million. Cash collateral is posted by us as well as our counterparty. We offset the fair value of the derivative and the obligation/right to return/reclaim cash collateral. The change in market value of credit default swaps is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty when the change in market value is over $250,000. Credit default swaps had a net carrying value of an asset of $211,000 as of September 30, 2013, which is included in "Derivative assets, net" in the consolidated balance sheets. At December 31, 2012, credit default swaps had a carrying value of an asset of $170,000, which is included in “Derivative assets, net” in the consolidated balance sheets. We recognized unrealized losses of $689,000 and $820,000 for the three and nine months ended September 30, 2013, respectively, and $1.4 million and $3.1 million for the three and nine months ended September 30, 2012, respectively, that are included in “Unrealized loss on derivatives” in the consolidated statements of operations.

Marketable Securities and Liabilities Associated with Marketable Securities and other – We invest in public securities, including stocks and put and call options, which are considered derivatives. At September 30, 2013, we had investments in these derivatives totaling $887,000 and liabilities of $298,000. At December 31, 2012, we had investments in these derivatives totaling $612,000 and liabilities of $299,000.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

11.
Fair Value Measurements

Fair Value Hierarchy – For disclosure purposes, financial instruments, whether measured at fair value on a recurring or nonrecurring basis or not measured at fair value, are classified in a hierarchy consisting of three levels based on the observability of valuation inputs in the market place as discussed below:
•
Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets.
•
Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
•
Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability.

Fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Fair values of interest rate caps, floors, flooridors, and corridors are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rates of the floors or rise above the strike rates of the caps. Variable interest rates used in the calculation of projected receipts and payments on the swaps, caps, and floors are based on an expectation of future interest rates derived from observable market interest rate curves (LIBOR forward curves) and volatilities (Level 2 inputs). We also incorporate credit valuation adjustments (Level 3 inputs) to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk.

Fair values of credit default swaps are obtained from a third party who publishes various information including the index composition and price data (Level 2 inputs).  The fair value of credit default swaps does not contain credit-risk-related adjustments as the change in fair value is settled net through posting cash collateral or reclaiming cash collateral between us and our counterparty.

Fair values of marketable securities and liabilities associated with marketable securities, including public equity securities, equity put and call options, and other investments, are based on their quoted market closing prices (Level 1 inputs).

When a majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. However, when valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, which we consider significant (10% or more) to the overall valuation of our derivatives, the derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy. Transfers of inputs between levels are determined at the end of each reporting period. In determining the fair values of our derivatives at September 30, 2013, the LIBOR interest rate forward curve (Level 2 inputs) assumed an uptrend from 0.18% to 0.23% for the remaining term of our derivatives. Credit spreads (Level 3 inputs) used in determining the fair values of hedge and non-hedge designated derivatives assumed an uptrend in nonperformance risk for us and all of our counterparties through the maturity dates.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents our assets and liabilities measured at fair value on a recurring basis aggregated by the level within which measurements fall in the fair value hierarchy (in thousands):

 
 
Quoted Market Prices (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
Counterparty and Cash Collateral Netting (4)
 
 Total
 
 
 
 
September 30, 2013:
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Derivative Assets:
 
 
 
 
 
 
 
 
 
Interest rate derivatives - non-hedges
$
—

 
$
45

 
$
—

 
$
45

(1) 
 
Credit default swaps
—

 
2,113

 
(1,902
)
 
211

(1) 
 
Equity put and call options
887

 
—

 
—

 
887

(2) 
 
Non-derivative Assets:
 
 
 
 
 
 
 
 
 
Equity and US treasury securities
24,142

 
—

 
—

 
24,142

(2) 
 
Total
25,029

 
2,158

 
(1,902
)
 
25,285

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
 
 
 
 
 Short-equity put options
(157
)
 
—

 
—

 
(157
)
(3) 
 
 Short-equity call options
(141
)
 
—

 
—

 
(141
)
(3) 
 
Non-derivative Liabilities:
 
 
 
 
 
 
 
 
 
 Margin account balance
(1,124
)
 
—

 
—

 
(1,124
)
(3) 
 
Total
(1,422
)
 
—